Approximately half of pension savers don’t know how much they have accumulated under their retirement scheme, and of those who are saving 4 out of 10 aren’t saving enough.
The main stumbling point when it comes to providing funds for retirement, is how much? Do we save for the amount we expect we will need in retirement? or do we set aside what we can afford now? There are so many variables to consider when planning for retirement and there is no wrong or right way to achieve a secure retirement. Below are a few areas to consider to make sure we’re moving in the right direction.
It makes sense to start with our current salary and work forward from there. There is no ideal amount to save, but 12 to 15% of current salary would be adequate when saving into a defined contribution pension scheme. At retirement we have the option to purchase an annuity which will provide an income for life, or drawdown the income and capital from the invested pension funds. As earnings increase during our careers, increasing our pensions savings in line with this would be prudent and therefore avoid the burden of excessive increases as we near retirement age.
Calculating and monitoring the projected pension fund value is crucial, and should be done on a regular basis to make sure we are keeping on track. Review the performance of the underlying investment, especially during volatile markets, make adjustments when needed. There are many online calculators, but these are based on a number of varied assumptions, they give at best rough estimates of the future value of the retirement fund. Closer to retirement with fewer variables online calculators can give a more accurate projection of retirement income and the future value of the pension fund.
Define an Action Plan.
How will income be taken once in retirement? Will a lump sum be taken from the pension pot before drawing down pension income? Is there a requirement for the pension to be passed on to a spouse or beneficiaries at death? Will income be taken from an annuity or will the pension remain invested and the income be taken from capital growth and income produced, via the investments within the pension. Careful consideration has to be given to these factors, for example currently an annuity in the UK for £100,000 will buy £4,741 of annual income. This income can vary of course depending on the type of annuity purchased, for example if the annuity rate is fixed or if for a joint life annuity we could find the annual income provided is lower.
Closer to Retirement.
As we get closer to retirement age we need to start to consider after work life, how much income is needed to support our lifestyle required in retirement. A useful guideline can be 2/3 of pre-retirement income, we will find hopefully that many major outgoings have been reduced closer to retirement, work related expenses and mortgages, supporting/educating children etc. Consider reducing risk exposure across the pension portfolio as retirement draws closer, major fluctuations are not welcome at this stage and large shortfalls in value are difficult to make up. During this period if income projections are not quite inline with expectations a significant increase in contributions can be made. This is also a period to consider additional assets that are held, such as rental property, other investments & savings and also entitlement to state pension schemes.
When reaching retirement consider which assets income will come from initially, depending on the structure of additional assets outside of our pensions it could be more tax efficient to delay drawdown from our pension schemes. Where we retire and where our pensions are domiciled is also a major factor on what taxes could be due on any income payable. What is the tax treatment on the income we drawdown, is pensions income taxed? How does the jurisdiction where our pension funds are held, if not in the same country as we live, tax the income drawdown? Do they tax at source or are we required to complete a tax return? Does the pension jurisdiction have a double taxation treaty with the country we will retire in? Are there more tax friendly jurisdictions where our pension funds can be held?
Have a plan in place,
consider a realistic retirement income target and make sure the plan is flexible, our careers and objectives can change numerous times over a lifetime. Make sure as well as flexible, the plan is cost effective, you need to generate a return on the capital invested and not have the returns swallowed by excessive fees. Keep the investment portfolio nimble, diversified and most importantly liquid, daily traded with the ability to move to cash sharpish if needed. Most importantly start.