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How much do you need to retire comfortably? £20,000, £30,000 or perhaps more? Naturally, a large part of the answer depends on what kind of lifestyle you want. A more “lavish” one – with regular long-haul holidays, a new car every 3-5 years and other conveniences – will almost certainly result in the need for a higher income.
Yet other important factors are at play including the likely cost of living during retirement (i.e.g inflation) and changes in wider society. Today, for instance, almost everyone has a smartphone with internet access; something unheard of a few decades ago. Regardless of how much you may need, however, pensions are likely to form a crucial part of your retirement plan.
Below, we explain why pensions are so useful for UK retirement planning in 2022. Moreover, you can find indications for how much you might need to achieve a comfortable retirement. We hope you find this content useful. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
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Why are pensions so powerful?
Saving for retirement is no small feat. Every “boost” or tax saving you can get will go a long way to helping you achieve your goals. Here, pensions stand out as a great option. First of all, each year you can put up to £40,000, tax-free, into your pots. Or, up to 100% of your yearly earnings (if these are lower). Any capital growth or dividends generated inside are tax-free. Secondly, under the UK’s “tax relief” system, your contributions are “topped up” by the UK government according to your rate of income tax. So, someone on the Basic Rate gets a 20% boost to their contributions. A Higher Rate taxpayer gets a 40% boost.
How much pension do I need?
Really, this question is asking: “How much do I need for retirement?” Here, it is best to speak with a financial planner to get more definitive answers for your situation. However, according to Which?, at present a “comfortable retirement” costs about £19,000 per annum (or, £26,000 for a couple). What follows is a huge simplification, of course. However, if you assume a State Pension yearly payout of £8,060 and you retire at age 65, then a £19,000 (after tax) overall retirement income would likely require pension savings at around £305,000 at today’s rates.
Naturally, you might require more than this – or less – depending on your financial goals and situation. Also, it is worth stating that you could make your pension savings stretch further if you opt for income drawdown (instead of buying an annuity), although this comes with investment risk. However, hopefully these figures give you something of a starting point.
Am I on the right track with my pension?
To start answering this question, you must first establish where you stand. First of all, how old are you and when do you plan/hope to retire? A 20-year-old, for instance, potentially has over 40 years to grow her retirement portfolio. Someone in their mid-50s, however, has a far shorter investment horizon. This will affect how aggressively you may need to save (which we will turn to again in a minute).
Secondly, what have you saved already? Taking stock of your assets will help determine how great a “gap” you need to fill with additional savings. Here, multiple aspects of your financial plan need to be considered. In particular, your State Pension is important. To get the full new State Pension (about £9,627.8 in 2022-23) you need at least 35 “qualifying” years on your National Insurance (NI) record. These are typically built up via your employment under PAYE rules. If you have accumulated 25 such years, therefore, then you need 10 more to get the best State Pension deal. This is well worth aiming for, since your State Pension income should come in for the rest of your life – and should rise each year under the “triple lock” system.
Of course, it is also wise to track down all of your pension schemes – e.g. personal pensions and workplace pensions. If you are age 65 and these, together, contain about £250,000, then you may be very close to your retirement objectives. Those who have far less and are nearing retirement may need to consider their options with a financial adviser. Perhaps you have other assets that could be used to help achieve your goals. For instance, a second home could be sold and some/all of the proceeds put into your pension (under the UK’s “carry forward” rules). Some people could also consider working a bit longer to boost their pension.
Helping your child onto the housing ladder is a noble aim. However, make sure you do not inadvertently harm your wealth and finances – or that of your child – without a strong tax plan.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
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