James Wright, Independent Financial Planner, examines the level of savings needed to maintain a comfortable lifestyle after retirement.
It’s a tough thing to do, but sooner or later you will need to have a reality check about your finances after you retire. We are all living longer, which means that our pension savings also need to increase to cover our needs as we get older.
The hard facts are these: the average life expectancy for a man aged 50 is now 84, and 87 for a woman aged 50. If a person needs an income of £2,000 per month to live on then they need £26,875 per year before tax. The full state pension is currently £8,767 per year, which means you need to find £18,108 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 approximately £250,000 and a woman will need approximately £275,000, due to the additional years. (This figure assumes a growth rate of 5% per annum on your pension savings.)
The required sums assume only living to life expectancy and drawing down from the pension until it reaches £0. As many people live beyond life expectancy, as it’s an average, and investment returns can’t be guaranteed, many are likely to require pension funds in excess of this for retirement.
Tax relief on personal pension contributions is generous. Every UK resident (under the age of 75) has 20% of their contribution paid by the government from basic rate tax relief, contributions may be limited allowances. As an example, for every £80 you pay to your pension provider this is increased to £100 through tax relief. 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 your circumstances and provide bespoke advice to meet your objectives can be key to achieve the best returns from your money. This could even mean being able to retire sooner.
Scrutton Bland’s financial advisers work by understanding a client’s circumstances and objectives. In addition, they will look to understand an individual’s attitude to risk and match this with an appropriate asset allocation strategy within any investments or pensions. By investing in a range of sectors including UK and overseas equities, fixed interest assets including government gilts and corporate loans and the commercial property sector, a client’s pensions and investments can achieve growth to meet their objectives over the longer term without them needing to take uncomfortable risks.