No matter what stage in life we’re at, most of us have daydreamed at some point about what our retirement might look like. Whether it’s enjoying some epic adventures, embarking on home improvements, looking after grandchildren or moving abroad to warmer climes, this next stage of our lives is the perfect time to turn some of our dreams into reality.
However you want your retirement to look like, it may feel a long way off right now thanks to the current cost-of-living crisis, which has seen everything from energy to grocery costs shoot up. It’s hard to put money aside for the future when you’re struggling to pay for the present.
It's no wonder that planning for retirement is something many of us are guilty of putting off, but it’s one of the most important things we can do for our future selves. Research by Isio and the Resolution Foundation, commissioned by the Living Wage Foundation, found that 16 million people are not currently saving enough for a comfortable retirement. What’s more, one in six over-55s have no pension savings yet, according to Unbiased.co.uk.
"Even in difficult times, it’s important to consider all your options before making any short-term decisions that can impact your retirement plans," says Katharine Photiou, Commercial Director of Workplace Savings, Legal & General. "While retirement might seem like a long way off, the earlier you start planning it out, the more likely you are to retire comfortably."
One big issue which needs to be considered is whether you are likely to be paying accommodation costs - such as rent, or a mortgage - while you are retired and living off your pension income, but there are many other factors to consider. Don't feel like you're left it too late though: while it’s good to plan your retirement early, it’s never too late to start.
What is a retirement plan and why do I need one?
If you want to have a comfortable retirement (and who doesn’t?), planning what it would entail to achieve it can help you feel more in control of your finances and give you some well-deserved peace of mind.
Making a retirement plan involves thinking carefully about your aspirations for life after work and your financial goals for the future, and carefully mapping out how you’ll make your retirement dream happen.
Caroline Siarkiewicz, chief executive of the Money and Pensions Service, says: "Retirement could last almost as long as your time spent working, so it’s really important we keep an eye out for our future selves and pay our pensions some attention.
"Our research shows that over half of people who have paid their pension some attention like this feel roughly on track for a reasonable income in retirement (60%), compared to 29% of people who haven’t taken any action.
"Having a goal for the retirement you want can also inspire you to take action. Our figures show that three quarters of pension action-takers (75%) had put a great deal of thought into their financial goals for the next five years, compared to 51% of those who had not taken any action."
Why women in particular need to plan for retirement
It is especially important that women take time to make a retirement plan, as they are most often the ones who take on the roles of carers at home, taking time off to look after their children or relatives, which can impact the amount they have to retire on.
A 65-year old woman is expected to live to 87, or two more years than a man of the same age, according to the ONS life expectancy calculator, giving her an average of 22 years after retirement. Despite this, research from Scottish Widows shows women aged between 65 and 74 years old have saved half as much money for retirement as men the same age. Women of this age group have savings worth £130,000, whereas men will retire with £260,000 in their pension pot.
The discrepancy is due to a multitude of factors, including the gender pay gap which is at 17% at the start of women’s career and at 56% when they retire, part-time work or taking a career break to look after children.
Jackie Leiper, Managing Director of Workplace Savings, Scottish Widows, said: "Despite the progress that’s been made in recent years by getting more women to save adequately for their retirement, there’s still a mountain to climb to reach true pensions parity."
Putting together a retirement plan might feel like a daunting task but if you take it step-by-step, it shouldn’t be. Putting in a little time now to think ahead will mean having the lifestyle you want when you do decide it’s time to retire.
How do I make a retirement plan?
In order to make a retirement plan, you’ll need to look at what kind of lifestyle you’d like to lead when you finish working and how much you’ll need to fund that. Next, we’ll explain how to work out much you’re currently on track to have as an income when you retire. Finally, we’ll look at ways you can bridge the gap, if there is one, between how much you’re likely to get and how much you'll actually need.
How much will I need for the retirement I'd like?
Start your pension planning by thinking about when you’re likely to retire and what you want to do. Whether you want to keep living the life you are now (minus work!) or sell your house and move abroad, think about your options and plan accordingly.
Helen Morrissey, senior pension and retirement analyst at Hargreaves Lansdown, says: "As you progress through your career, having an idea of what you would like your lifestyle in retirement to look like is important as it will help you gauge how much you will need to have in your pension. Checking your progress on a regular basis will help you stay on track so there are no nasty surprises, and you have the time to plan how you can plug any shortfalls that may come up."
The Joseph Rowntree Foundation’s minimum income calculator estimates that, in order to reach a minimum socially acceptable living standard in 2024, a single person needs an annual income of £29,541, a couple needs to earn £20,323 each and a couple with two children need £56,750 between them. Everyone’s retirement dream can look different depending on their lifestyle, but Joseph’s Rowntree Foundation’s estimates are a good reference point. Remember that it will make a huge difference in the amount of income you will need in retirement if you still have housing costs such as a mortgage or rent to pay.
How much pension income am I on track to get?
Your income in retirement is likely to come from one or all of the following sources, so it’s important to know how much each is likely to give you.
State Pension
The State Pension is currently £221.20 per week which works out at £11,502.40 a year.
To find out how much State Pension you are on track to get, go to gov.uk/check-state-pension. This will tell you how much State Pension you could get, at what age and how you might be able to increase it. You can also check this via the HMRC app or call them directly to ask for more information at 0800 731 7898.
Those who are eligible have until 5 April 2025 to pay voluntary contributions to make up gaps in their NI record between 6 April 2006 and 5 April 2018. From 6 April 2025, people will only be able to pay voluntary contributions for the previous six tax years, in line with normal time limits.
Workplace pension
Take a look at your pension provider’s website or your annual statement which should provide you with a prediction of annual income once you retire. A useful tip is to make a list of every job you've had over the years and match each one with a pension. Are there any years or jobs unaccounted for? This could mean you might have lost track of a pension and could be in line for some extra money when you retire.
According to the Association of British Insurers, approximately £26 billion is sitting in 2.8 million lost pension pots, so trying to track down what you’ve already got is a good place to start. You might also want to consider consolidating your pots to make them easier to manage.
"Make sure to trace all your pension pots," says Katharine Photiou of Legal & General. "We’re a nation of job hoppers and as we move around our pension pots can get lost or forgotten."
Money Helper’s pension calculator will help you get a forecast of how much you’re likely to need in retirement and the likely pension income you’ll get when you retire. There's also a useful pension-tracing letter template so you can start tracking down any missing pensions.
What can I do to improve my pension forecast?
The question to ask now is, am I saving enough for retirement? Look at the numbers you’ve come up with in the above sections: the amount you’ll need and the amount you’re on track to get. What’s the difference?
If you’re not currently on track, the good news is that you have a number of ways to make up the discrepancy:
If you can afford to, up your pension contributions. Increasing how much you pay in by even 1% could make a big difference to your retirement savings. Calculations by WealthAtWork show that saving just an extra 1% into your pension from the age of 25 can boost it by a quarter when it comes to retiring, for example, a 25-year old earning £40,000 a year could benefit by £49,670 by the time they retire at 68, boosting their pension pot from £198,683 to £248,353, an increase of £49,670 or 25%.
For those who have a defined contribution pension, making extra contributions in the years before retirement brings an immediate boost in the form of tax relief, so paying an extra £400 in the above example would only cost £272. Be aware that the limit of how much you can pay in your pension pot each year is £60,000 or the equivalent of your salary, whichever is lower.
Can you delay taking your pension?
Delaying the date you start taking the State Pension can make a big difference to the level of pension you’ll get too, as it will increase by 1% for every nine weeks you defer, according to MoneyHelper.
Another option is to delay taking your workplace pension. Whether you decide to keep working and paying into your pension or to retire but to leave your pot where it is for a few years, keeping your pension invested for as long as possible has many benefits. Not only do you get the tax relief, compound interest will be working its magic on your money.
Let’s say you have £130,000 in your pension fund by the time you reach retirement. If you want to delay retirement and you pay £300 per month into your pension pot monthly, your pot will grow to £137,500 after one year left untouched, or £169,819 after five years, according to MoneyHelper. Use the handy calculator on the MoneyHelper website to see what delaying could mean for you. Before you make any plans, check with your pension provider that there are no restrictions or charges involved if you delay.
Where can I get more advice?
"Make the most of free support from websites such as MoneyHelper or engaging with the Retirement Living Standards," says Katharine Photiou. "Small steps like these can play a big role in helping people find the right help or planning for their ideal future from a more informed position."
If you feel you need more advice, find an FCA-authorised financial advisor on websites such as unbiased.co.uk or vouchedfor.co.uk. They should be helping you check your money is in the right place and not being eroded by hefty fees and charges.
If you’re over 50 and have a defined contribution pension, you can get free advice and guidance from a government service called Pension Wise. An advisor will talk you through what your overall financial situation will be when you retire, your options, tax implications and your next steps. Book a phone appointment at moneyhelper.org.uk/pension-wise, or call 0800 011 3797.
