It’s a tough thing to do, but sooner or later you will need to have a reality check about your finances before you retire, says Rob Wood, Independent Financial Adviser at Scrutton Bland. We are all living longer, which means that our pension savings need to go further. Add to this the rising state pension age, and it begs the question of when you can actually afford to retire.
The hard facts are these: the average life expectancy for a man is now 80, and 83 for a woman. If a person needs an income of £2,000 per month then they need £24,000 net per year to live on. The full state pension is currently £8,767 per year meaning you need to find £21,233 gross per year from your pension fund to generate a net income of £2,000 per month for the rest of your life (based on average life expectancy). Retiring at 67 years old means the average man will need a total pension pot of £232,992 and a woman will need £274,843. (This figure assumes current growth rates of 2.5% per annum in excess of inflation on your pension savings.)
These figures sound frightening, but broken down are not quite as scary: if a man starts saving at 40 years of age (with no other pension savings) then he needs to put aside £469 per month, and a woman would need to save £553 per month in order to get to the level of contributions needed for £21,233 gross per year.
Tax relief on pension savings is generous, and every UK resident (under the age of 75) has 20% of their contribution paid by the government from basic rate tax relief. So every extra £80 you pay to your pension provider is increased to £100. If you pay 40% or 45% income tax then you can reclaim further tax relief of 20% or 25% via your tax return.
There are also other things that you can do – the most obvious of which is to manage your savings! If you have had a number of jobs over your career then you may have multiple pension pots, or you may have a lump sum from a bequest or selling a house. Investing this money wisely sounds obvious, but many people still have their savings in low interest accounts, when with a little effort, their money could be earning much more for them. Getting good advice from an independent financial adviser who can look at the whole of the market, rather than steer you to a limited range of investment options, is crucial: if your investments perform poorly then your income will dwindle.
Scrutton Bland’s financial advisers work by asking a number of questions to our clients which enables us to match an individual’s attitude to risk with an appropriate asset allocation strategy. By investing in a range of equities in the UK, US, European and Far East sectors, as well as fixed interest assets including government gilts and corporate loans and the commercial property sector, pensions and investments can provide growth over the longer term without having to take risks an individual is uncomfortable with. Pensions can also very effectively provide income tax reliefs on contributions and tax free growth before becoming a source of income in retirement.