As you hit your half century a big party isn't the only thing you should be planning. It may still seem like a long time away, but if you don't start retirement planning until you are in your 60s you will not have enough time to make a difference to your wealth, and could end up retiring with less money than you hoped for or working for longer.
"While you are in their 20s, 30s and 40s your financial resources tend to be pulled in other directions such as mortgage payments, rent, and childcare and education costs," says Tamsin Hazell, chartered financial planner at Succession Wealth. "But when you are in your 50s, although these financial commitments haven't necessarily disappeared, they have typically reduced. And people in their 50s are likely to be at their top of their career so their earnings are likely to be at their peak, making it a great time to concentrate on pensions saving."
So if you're in your early 50s, follow these steps to ensure you can retire when and how you want.
Work out what pension savings you've got
Contact all your pension providers and ask them for an up-to-date statement on the value of your pensions. You may have a mix of defined benefit (DB) and defined contribution (DC) pensions. A DC pension's value is affected by how much you pay into it and where it is invested. But a DB pension will pay a guaranteed annual income when you reach the scheme's retirement age.
If you have difficulty getting information on pensions you haven't contributed to for many years, for example, with a previous employer, contact the Pension Tracing Service. This free service searches a database of more than 200,000 workplace and personal pension schemes to try and find the contact details you need. You can call the Pension Tracing Service on 0845 6002 537 or complete an online request form at www.findpensioncontacts.service.gov.uk.
It's also a good idea to get an estimate of how much state pension you might get, based on your National Insurance contribution records. You can check this at www.gov.uk/check-state-pension.
"Checking your pension a couple of times a year is a good habit to get into from age 50," adds Nathan Long, senior pension analyst at Hargreaves Lansdown. "You can make this job easier by viewing your pension online, and you may want to consolidate your pensions so it is easier to keep track of them. Also make sure you are not giving up any valuable guarantees, particularly on some older pension plans."
Think about when you want to stop working
When and how you would like to stop working? For example, are you planning to completely stop at a fixed date? Or do you envisage a more gradual approach by working part-time from a certain age? Gradually moving into retirement by working fewer hours is growing in popularity – nearly 1m people over 60 work part-time in the UK.
"Clients often start conversations saying I want to retire in 10 years' time or I want to retire when I'm 60," says Gary Smith, chartered financial planner at Tilney Group. "And I always ask them to quantify what's going to enable them to retire at that time. For example, are they going to be mortgage free or will they be able to live on a certain amount a month? It's the level of income you want that will dictate when you retire – not your age."
Figure out how much income you will need
Working out how much retirement income you will need can be tricky.
"One of the things people don't understand well is how much income they might need," says Mr Long. "Generally, somebody who has just retired is probably not going to see their income expenditure come down that much because they'll be more active and wanting to enjoy their retirement, for example, by travelling."
From around your late 70s you may not spend as much as you will be less active. But the cost of care in later life can be extremely expensive. See the "The care conundrum" for how to prepare for this possibility.
To estimate your retirement income requirements, you should firstly calculate your current base income expenditure. Add up all the money you spend on household bills, mortgage or rent payments, the cost of commuting to work, and any other essentials. Then imagine what you will spend when you have stopped work. For example, you might be able to exclude the costs of mortgage repayments and commuting transport costs. When you have a figure for your essential expenditure, you can do the same for your discretionary expenditure by working out how much you spend on holidays, eating out and treats.
Try to plug any shortfall
After establishing what you have and estimating your income requirements, you can work out how much you will need in total to generate the income you are looking for. Ms Hazell says if, for example, you are looking for an income of £30,000 a year which you'd like to grow in line with inflation estimated at 2.5 per cent a year over a 30-year retirement period, you would need a retirement fund of £648,484, before you could make withdrawals. This is based on a DC pension with an investment growth rate of 5 per cent a year net of fees. Knowing how much you will need to meet your income requirements will give you an indication of how far away you are from your target.
You can check your progress and see if you have a gap in your retirement savings with an online pension calculator, for example, government sponsored www.moneyadviceservice.org.uk/en/tools/pension-calculator. Investment platforms' such as Hargreaves Lansdown, IG and Nutmeg also have pensions calculators on their websites.
"Don't be put off if you [have a gap in your retirement saving]," says Mr Long. "It's fairly common and you still have time to change your financial future. Even paying a little more into a pension can make a big difference: for example, just adding an extra £80 per month from age 50 could add up to around £25,000 more in your pension by the time you reach age 67. Speak to your boss if you are employed, because many companies will increase how much they pay into your pension if you pay in more too."
In the current tax year, you can normally make pension contributions of up to either £40,000 or what your earnings are – whichever is lower. You can also carry forward unused pension annual allowances for up to three years. However, the annual allowance is tapered away for anyone earning more than £150,000 a year, to a minimum of £10,000.
And don't just think about pensions. Having money in different tax wrappers including pensions and individual savings accounts (Isas) will help you take your retirement income tax-efficiently.
As well as making use of tax wrappers such as pensions and Isas, you can help to plug a retirement income shortfall by taking more investment risk. "Someone with a £100,000 pension at age 50 could boost their overall pension by over £20,000 if they improve their investment returns by just 1 per cent every year until they're 67," says Mr Long.
Consider your investment risk
Make sure you are taking the amount of risk that is appropriate for you, especially with DC pensions and self-invested personal pensions (Sipps), as with these you take the consequences of what stock markets and interest rates do.
Ms Hazell suggests using guaranteed forms of income such as the state pension or DB pensions to meet essential expenditure. "Doing this gives you licence to take investment risk with the pot of money you use to fund your discretionary spending," she says.
How much risk you should take depends on your personal attitude to risk, how much you can afford to lose and the length of time over which you are investing. At age 50 you could have another 15 or 20 years before you start drawing on your pension which gives you enough time to invest in equities and ride out any fluctuations in the stock market.
The amount of risk you take also depends on how you fund your retirement. If you're planning to use your saving to buy an annuity you should start moving out of higher-risk assets such as equities into cash as you get nearer to your retirement age. But if you plan to use flexi-access drawdown to take income or lump sums, while leaving most of your pension invested, you could be investing for another 20 to 30 years. This means you could take more investment risk.
"Using a pension pot to buy a secure income will be the right choice for lots of people, particularly if they do not sleep soundly when there is a possibility that their income might fall or stop completely," says Mr Long. "If you don't require income certainty, keeping your money invested may be attractive. And you can always do a bit of both, buying an annuity to cover retirement essentials while using income drawdown for nice-to-haves."
While you shouldn't ignore how you feel about taking risk, your ability to handle losses should take precedence when deciding how much risk to take. If you have a more adventurous risk appetite but your retirement lifestyle would greatly suffer if there was a fall in markets a few years before your retirement, then it is better to dial back your risk level. If you have a more cautious attitude to risk but a higher capacity for loss, then you can afford to take more risk.
Mr Smith says if you are cautious, a way to ensure you take enough risk to meet your goals could be to invest the assets you have already built up according to your personal attitude to risk, and adopt a higher-risk approach for new money.
It might also be a good idea to choose the funds your DC workplace pension is invested in yourself.
"Many workplace pensions automatically invest you in a default lifestyle strategy which automatically moves into lower risk assets the nearer you get to retirement age," says Mr Smith.
For example, it might move out of being 100 per cent in equities when you're 50, to being 75 per cent in gilts and 25 per cent in cash by the time you're 60.
"And that might not necessarily meet the level of risk you need, and could generate far lower returns than you'd like," he adds. "With so much in gilts, you could also see a substantial fall in the value of your pot if interest rates go up."
