11 April 2018

Start planning your pension strategy

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Spring has arrived. Hopefully, your Christmas debt hangover has receded after all the steps you took in the first quarter of 2018: setting goals, prioritising debt repayments and cutting costs to reach savings targets.

Now it's time to step up the pace and prioritise other areas of your personal finance. April is the start of the new financial year and a good time to focus on how  (This link will open in a new window)pension savings benefit your long-term financial fitness.

Pension provider Aegon conducted a survey last month in which 51% of people said that delaying their pension saving was their biggest financial regret.

If you do nothing else in April make sure you:

  1. Work out current pension savings

  2. Decide what retirement income you want

  3. Plan your strategy

1. Work out current pension savings

Check how much you'll receive in your state pension. You can do this online now, via the  (This link will open in a new window)State Pension area on the gov.uk website.

For now, its value is protected by the “triple lock". Each year it rises by whichever is the highest: the consumer prices index (CPI) inflation measure, average earnings growth or a minimum of 2.5%.

The state pension “triple lock" is guaranteed until 2020 but may not survive beyond that depending on future government policy, so annual increases could become lower.

The state pension age is changing. Currently, men and women receive it at 65, but it's rising to 67 gradually, depending on when you were born. You can check your state pension age  (This link will open in a new window)online.

Alongside the state pension, employees have company pensions. The introduction of  (This link will open in a new window)auto-enrolment means virtually all employers now offer a contributory company pension. You can opt out but this is not recommended, as you'll lose employer contributions.

The  (This link will open in a new window)self-employed don't get employer contributions through auto-enrolment. Instead they invest in a private pension and get tax relief of £25 for every £100 a basic rate taxpayer invests, up to the annual allowance of £40,000, or the lifetime allowance of £1.03m for 2018-19.

2. Decide what retirement income you want

This will be influenced by your age now and the age you'd like to retire at. In your twenties, you have time to build a bigger pension pot. This becomes progressively harder the older you get.

Annuities require roughly £1,000 for £1 a week of income. So, to get £250 a week for life, you'd need to invest around £250,000 in an annuity. Coupled with the full state pension, you'd get £415 each week.

Outgoings should be lower in retirement as hopefully you'll have paid your mortgage off, so to maintain your living standards you'll need about two-thirds of the income you earned while working.

In April 2015, the tax rules were changed to give people greater access to their pensions. This doesn't apply to the state pension or defined benefit pensions but does apply to defined contribution or money purchase pensions. Drawdown of pension income is taxed at marginal income tax rates rather than the previous rate of 55% for full withdrawals. The tax-free lump sum continues to be available.

There are six options available including, leaving the pension pot untouched, purchasing an annuity, getting an adjustable income (Flexi Access Drawdown), taking cash in chunks (Uncrystallised Funds Pension Lump Sum), cashing in the whole pot in one go and mixing any of the options.

Remember, you can keep working beyond 65, even part-time, and still receive income from pensions.

3. Plan your strategy

Now you have your target total, build a strategy to reach your goal.

Additionally, you could invest in property, ISA tax-free savings or stock-market investments as potential options to supplement retirement savings. Diversification can be a good strategy.

To reach your pension pot target, it's a good idea to maximise the “free" money from your employers' contributions and tax relief. Always match the maximum amount your employer will pay.

Building retirement savings to your target won't happen quickly. Remember, April 2018 is just the start of a strategy that will last until you retire.

Consider your attitude to risk. Are you adventurous or cautious? Riskier areas have potential for strong growth but could fall in value drastically. Low risk investments are more likely to grow gradually but consistently.

Retirement may be decades away, but think about retirement saving now because the earlier you start, the easier it will be. Start early and through compound interest, your money really will work hard for you.

Check back next month for your FinFit must do's in May!

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