5 top tips for pension late starters
If you have left your pension planning to the eleventh hour, don't panic. Follow these five tips and take control.
When you're planning for your retirement the earlier you start the better. But if you're already approaching your 50s and you still haven't got round to thinking about how you'll pay for your twilight years, don't panic. True, pensions love nothing more than oodles of time in which to grow, but even if the clock's ticking it's never too late to get started.
Pension provider Skandia reckons many of us don't prepare for the financial side of retirement until much later in life. In fact the company's research shows that two out of three people in their 50s and 60s don't think about planning for their retirement until after their 50th birthday.
If you feel like time's running out, here are five tips to help you get your retirement planning off the starting blocks fast:
1. Work out how much you have so far
First of all you need to get a grip on the situation. If you have any old pension schemes you need to find out how much they're worth now. Get together all your old paperwork and contact each company or former employer if you had a work-based scheme. Get up-to-date valuations and a forecast of benefits for each one.
It's easy to lose track, so you may find your pension provision isn't quite as bleak as you thought, particularly if you have a long-forgotten pension fund which has been running for decades.
Once you have done that, review all your old schemes. That means looking at where the pension is invested, how well it has performed over the years and how heavy the charges are. Ditch any that don't measure up and transfer them to better schemes elsewhere. Although check for any benefits you might lose or transfer penalties you might incur before doing so.
2. Get a State Pension forecast
Once you have a better idea of your current pension provision, if any, you need to get a clear idea of what your State Pension could be worth when you retire. Head over to the DirectGov website, which gives a full run-down on how to get both a basic State Pension estimate, or a full State Pension forecast.
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If you're entitled to the full State Pension, then at current rates you'll receive an income of £97.65 per week for a single person which is over £5,000 each year. If you're a couple you'll receive £156.15 per week. These figures are increased annually.
After you have carried out tips 1 and 2, next think realistically about how much you're going to need to live on once you have stopped working. In an ideal world you should aim towards an income of between half and two-thirds of your previous salary. In practice this may be difficult to achieve, so work out how much will give you a reasonably comfortable standard of living.
You should now have an idea of the shortfall between the pension provision you have so far and the amount you need. Tips 3 to 5 will then help you make up the difference.
3. Start saving hard
Start saving now and save as much as you possibly can. Even if you're 50 now and you don't retire until you're 65 or later there still could be enough time to build up a reasonable pension pot. OK it's not as good as starting when you're 20, but don't forget it's never too late.
Even better, you'll benefit from tax relief on your pension savings.
If you're a basic-rate tax payer, for every £80 you contribute, you end up with £100 in your pension pot. And if you're a higher-rate tax payer, you'll only need to invest £60 out of your own pocket to get a £100 contribution into your pension fund with a generous 40% tax break.
Until recently, pension rules allowed you to invest up to 100% of your earnings into a pension fund as long as your contributions didn't exceed a cap of £225,000 in the tax year. This has been cut though to £50,000. So if you have some spare savings, you can invest a sizeable chunk into your pension which will also qualify from the tax break.
Jane Baker explains how to take control of your own retirement planning with a self-invested personal pension.
This can give a significant boost to your pension provision and get you on the road to a better standard of living once you retire.
4. Look at the alternatives
Although pensions are one of the most tax-efficient ways to save for your retirement there are alternatives. Any savings and investments you have accumulated over the years can help to support you during your retirement. You could also consider downsizing your home or unlocking its value through an equity release scheme.
5. Consider retiring later
Does the prospect fill you with dread? Unfortunately, this is becoming a reality for many. But there are several advantages you may not have considered before. By working longer you can pay more into your pension and leave it to accumulate over a longer period. On top of that, because you'll have fewer years in retirement your pension pot won't need to stretch as far.
Better still, as you're older you'll benefit from higher annuity rates. An annuity converts your pension fund into an income and a higher annuity rate equals a larger income.
Leaving your pension planning until your 50s isn't ideal, but it's not necessarily the end of the world either. There are plenty of practical steps you can take to improve the prospects for your retirement. So take the bull by the horns and get saving today.
This is a lovemoney.com classic article, originally published in December 2007 and updated.
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Not started a pension yet??? FORGET IT!! You are lucky not to have been throwing your savings into the private pension PIT, from which there is no escape. And WHY, WHY, WHY, do so many worrry about actual retirement. You are FREE!! Your shackles are gone!! Time is yours, decisions are yours, routine is a byeword, A new life is in front of you to enjoy. I retired with an annuity which started at almost £2,000 a month. It rapidly nose-dived- very very seriously, with predictions of a continuing downward spiral. Facing a deprived future with plans for travel etc., out the window, I upped and emigrated. For 10 years I have enjoyed life in a super climate, with every modern convenience, for health, culture, sports, and leisure at hand, most at a fraction of UK costs. My pension is now £242 a month, a mockery of the predictions given when I first started, and predicted by Prudential to drop another 5% this and next year. My advice would be to anyone, AVOID THE PENSION PIT, do not be seduced by the "tax benefits" - this really means "tax deferment". Make some sensible investments where you have control over your money and savings. A really good investment is to get super fit, healthy, active, normal weight, in order to enjoy every day of your new life.
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Unfortunately none of these five top tips are much use in actually improving one's pension investments. Tips 1 and 2 merely confirm just how paltry a return we can all expect with our more conventional pensions. As a teacher I have a final salary pension scheme (at the minute!) but I do wonder if there will even be such a thing in existence when I finally get to retire at 66, 70....75 or whenever the government deems we can all retire in the future. And as I only came into the profession late the most I can expect is half a normal teachers pension, so little comfort there then. Tip 3 - [i][b]Start saving harder[/b][/i] - is all very well but not really an option for the vast majority of the UK population who are either scrapping to make ends meet - or worse still just getting further and further into debt because they find there is "too much month left at the end of the money". Tip 5 [b]"[i]Unfortunately, this is becoming a reality for many"[/i][/b]. Agreed and - yes it does fill me with dread and rightly so. Why should a hard working man or woman, who has worked hard all their lives and paid their dues to society - have to get a paper round at 75 year old because their pension providers failed (miserably) to deliver the sort of projected returns they were promising back in the 1980's. Why should our older generation be forced to carry on working, stocking shelves in B&Q etc just to make ends meet? And what happens if they suffer from ill health and can't take a job? So let's look at Tip 4 - [i][b]Looking at the Alternatives[/b][/i]...Downsizing your home does make sense for some people and may help. As does borrowing against the equity in your home - assuming you have any equity left in the current property market - however, most people like to be able to at least leave their family something - other than a massive mortgage to clear! That's why I decided to look for another alternative. I don't want to be dependent on state handouts or to be a burden to my family in my old age. That's why I chose to get involved in a part time business opportunity which allows me to work a few extra hours a week (rather than vegetating in front of the old "income reducer in the corner" aka the TV). This not only pays me an extra income now but also allows me to build a residual income for the future, based on my customers ongoing spend each month. As long as I look after my customers and give them great customer service and great value for money, then they will stay loyal, continue to use the sevices and pay their bills every month. At least this opportunity will give me an additional income to either boost my pension in my old age and, if I keep at it for the next 5 - 10 years, hopefully it will outperform my pension provision altogether! I also do enjoy my work as a Utility Warehouse distributor and enjoy meeting new people and helping them to make genuine savings on their household spending and - contrary to some of the negative comments we get on this forum - I genuinely believe the products and services are very competitive and, certainly when taken as a whole package with the Cashback card and their special Customer Discount Plan, I believe the overall Club package is second to none. One of my customers was telling me last week how delighted he was when he got his Energy bill. It was for £72 - however, having been out buying his groceries and petrol and Christmas presents, he had managed to accumualte a cashback of £51 thus reducing his bill to only £21 - he tells me he'll never leave! Nor why indeed should he. And he is just one of many very happy customers. Please note I have NOT put any links to promote my own personal website - I am not seeking to promote myself or my business here, just trying to share another viable alternative to those who, like myself, are worried about their current pension provision. It will not be for everyone and that's understandable but for those who like the idea of earning a bit more money next year than they did this year - or who would like to build up a passive income for their retirement then do speak to a good reputable distributor who has been doing the business for a few years and check it out for yourself.
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06 December 2010