I don't know about you, but I find thinking about saving for retirement really difficult. I still feel relatively young, and perhaps there is a lottery win in my future meaning I don't need to save for my retirement? However, planning for the future it something that we all need to be doing. I have been taking a look at what my current pension provisions will provide me with, and choosing which steps to take next to save more for my retirement.
How to fund your retirement
Once we stop working to retire, we will still need an income to live off. The amount of income we need will depend on a number of factors, including things like whether we own our property and have paid off the mortgage to the lifestyle that we plan on having.
For the majority of us, we will be looking at getting a pension for our retirement.
Most people's pension is made up of three sources:
- State pension
- Workplace pension
- Private pension
Your state pension is made up from your National Insurance contributions over the years. You can use the handy Gov.uk tool to calculate how much state pension you are due to receive.
Your workplace pension is where you make contributions from your wages, and most employers offer a workplace pension now. If you have worked for different companies then you might have various workplace pensions. If this is the case for you, consolidating them might be a good idea so it'll be easier to manage your money when it's all in one place.
Your private pension would be something you have set up yourself – some people seek a financial advisor's advice first however seeking advice isn't compulsory unless someone has a defined benefit pension worth over £30K.
Pensions are a great way to fund your retirement, however, they aren't the only way.
You might also be considering investment properties, investments and other passive income to provide you with an income in retirement. You might also get a part-time job for an income and a social activity.
Benefits of a pension
There are some great benefits to having a pension.
One of the biggest is the tax relief. If you are paying into a workplace pension then you will only pay tax on your salary after your pension contributions have been taken.
If you are paying into a personal pension then you do pay tax on your earnings however the pension provider claims this back from the Government.
This means that if you pay a basic tax rate you get a 25% tax top up, so if you paid £100 into your pension, HMRC would effectively add another £25 which would bring the total contribution up to £125.
Other great benefits are compound interest, a guaranteed income when you retire and employer contributions. You can watch this video from PensionBee which covers the basics and the benefits for savers.
Working out how much you need with a Pension Calculator
Knowing how much you need to save for retirement can be a minefield. You need to work out how much money you will need to live off when you retire and then figure out how much you need to save for your retirement to reach your goals.
PensionBee helps you combine your old pensions and transfer them into a brand new plan, giving you complete clarity and control over your retirement savings.
PensionBee have created their pension calculator to help you to work out how much money you will have saved based on your current provisions. It is really fun to play around with it and see what differences you can make.
Playing around with the sliders is really interesting. You can change your retirement age, your current pension pot, your planned monthly contributions, one-off contributions and employer contributions, as well as whether you want to include your state pension pot or not. You can see how increasing your contributions just a little bit (by say £50 a month) can have a big impact on your overall pot size over time.
The calculator is automatically set to give you an annual income of £26,000 when you retire, however you might find that you want more or less than this amount.
As you can see, here I opted to retire at 55 instead, and make smaller personal contributions. You can see the difference in projected income with this.
Important things to note about the calculator
It is important to bear in mind that the income generated by the PensionBee pension calculator is an estimate, not a guarantee. The forecasts that PensionBee have are just that – forecasts. The calculator does take into account a 0.5% annual charge from your pension provider, which could be higher from other pension providers.
The key takeaways for getting the best use out of the calculator is to see if you're saving enough for a comfortable retirement and ensuring you stay on track. It also helps to make sure you're making the most of the spare money you have now and reaping all of the benefits.
One of the biggest financial mistakes I have made was to not start my pension years ago.
I am not alone though; according to research conducted by PensionBee, the average UK pension pot is £21,441, although that does vary across the country. within the North East pension pots are an average of £14,513, and in the South East, they have £28,183 on average.
Thankfully there is still time to make a difference. PensionBee suggests that if you can contribute 15% of a £30,000 salary from age 30, you can still expect a pension pot of £196,100 at retirement. However, if you delay this until you are 45, your pension pot will be around £109,500 at retirement. This is really simple to fix by starting to make contributions to a pension right now. Anything that you can put into a pension now will help you in retirement.
By using the pension calculator I have discovered that I have a lot of work to do if I want to achieve my goal to retire at 55. In order do this there are a few things I need to do. I plan on increasing my income by growing my business and looking at more passive income sources, as well as making more contributions into a pension and other income streams for retirement, such as property purchases.
This is a collaborative post with PensionBee. PensionBee is authorised and regulated by the Financial Conduct Authority. With pensions your capital is at risk and your pension can go down as well as up, meaning you may get back less than you started with.