There are no short cuts to building a decent pension.
Start early, and save hard.
The basic state pension is less than £5,000 a year, and with the average retirement now spanning 20 to 30 years, there has to be more cash ‘in the pot’.
For a full pension, a woman must have 39 years of contributions, and a man 44 years. From 2020, it will be 44 years for both.
Here are a few guidelines if you are planning a pension:
Step 1: Start your pension contributions now
Do not delay – start today! To figure out how much to save, take your age, half it and turn this into a percentage. At 30, for instance, you should be contributing 15% of your income to your pension.
Step 2: Set your retirement planning target
How much will you need for comfort in the retirement stage of your life? Factors to consider are:
· The age you intend to retire
· General living expenses
· Children or dependents
· Desired lifestyle, holidays, hobbies
· Amount of your state pension
· Where you will live
… and remember to take inflation into consideration.
Step 3: Set up a private pension
For a better retirement income, set up your own private pension, as the state pension will just be enough to live on and no more. Its yield will depend on how the underlying investments perform, and the annuity rate when you retire. If your employer offer and occupational scheme it is best to join it as your employer may make contributions. This option is becoming less common with less generous contributions. Payments into personal pensions earn tax relief.
Step 4: Convert your pension into income
You have to convert at least 75% of your pension into an income when you retire. To do this, you must buy an annuity, an investment that pays you a regular income for life. The remaining 25% is yours as a tax-free lump sum.
Shop around to find the best annuity; the choice is crucial, as you are tied in for life.
Step 5: Other investments
You can also top up your income with other investments, such as the Individual Savings Account (ISA), funds, shares, bonds, and property.
In conclusion, set up your pension plan as soon as you can, and do not depend on your state pension.
Invest early and often, for a long and carefree retirement!
