As we bask in this long hot spell, many of us will start dreaming of giving up work and enjoying a sunny retirement, doing the things we’ve always wanted to do. However, some recent surveys suggest that many of us could be in for a bit of a shock.
A new survey from The Personal Finance Society suggests that many are at risk of running out of cash in retirement, particularly those who have cashed in their pension pots early. They are using the new pension freedoms to withdraw some or all of their pension pots, yet are seriously under-estimating how long they are likely to live.
Since the pension freedoms were introduced just over three years ago in April 2015, £17.5bn has been taken out of pension savings. Latest figures from HM Revenue & Customs show £1.7bn was withdrawn in the first quarter of 2018. A total of 500,000 payments were made in the quarter to 222,000 people with an average withdrawal sum of £7,644. With no need to buy an annuity with the money, people can spend their money how they wish.
Another survey, from the Pensions and Lifetime Savings Association (PLSA), entitled ‘Hitting the Target’, found that potentially millions of savers are in the dark about whether they are on track for a comfortable retirement.
Whilst 34% of people say they could save more for retirement, uncertainty about how much cash they will need may be holding people back, the report suggests.
Automatic enrolment into workplace pensions, introduced in 2012, has helped, but many wrongly assume that the minimum contribution level is the target they should be aiming for to be comfortably off, according to the survey.
So what can you do to ensure you have a comfortable retirement? The first thing to do is start as early as possible, as the cost of delay has been well documented.
A major reason to start early is to gain the full benefit of compound interest, which helps to turbo-charge your savings. Described by Albert Einstein as the ‘eighth wonder of the world’, compound interest means a £1,000 lump sum invested when you are 21 will have grown to almost £11,000 by the time you are 70, assuming 5% annual growth. If you wait to invest till you are 40, it would be worth only £4,300.
The reality, of course, is that it is never too late to start saving for retirement. It has been said that the best time to start a pension was years ago. But the second best time is now. It will still be possible to build a decent pension pot but will require more sacrifice and willpower to achieve it.
Obviously when you are younger, you may not want to be locking money away for 40-45 years, so looking to use an Isa, where you can currently save up to £20,000 annually tax-free, makes sense. Having a cash buffer or ‘rainy day’ fund is always good practice.
As you reach your late 40s, early 50s, you need to start thinking seriously about retirement planning. This includes getting your pensions and other savings (Isas, savings, property etc) in order to see what you’ve got, what your likely retirement income will be from them and whether you need to address any shortfall to achieve the standard of living you aspire to. Pension consolidation might also make sense at this stage.
As we are all living longer, thinking about your retirement savings is important, whatever your age.
The reality is that it takes tough financial discipline to make your retirement dreams come true. So the time to think about planning for retirement is now!
For help with your pre-retirement and retirement planning needs, call Kellands today.