For a comfortable lifestyle in retirement people will need at least £43,000 per year.
Pension Credit – Could you or someone you know be eligible?
Too many people are losing money from their pension pots because of simple mistakes like failing to apply for government credits and low-performing pensions, however, essential tips from a finance expert explain how you can get your money in check.
Recent data from the Pensions and Lifetime Savings Association (PLSA) shows that £43,900 is needed annually for a comfortable lifestyle in retirement, yet more than a fifth of Brits feel unprepared for their later years.
The PLSA sets three different retirement lifestyles – minimum (£13,400), moderate (£31,700), and comfortable (£43,000) – to give people a general indication of the kind of lifestyle they may be on track for in retirement.
READ MORE: Thousands of pensioners receive HMRC tax refunds of up to £106,900READ MORE: People nearing retirement age could boost annual State Pension payments by up to £694
To help prepare yourself for retirement, finance expert Antonia Medlicott, Managing Director of Investing Insiders, has shared five things you should do to give yourself a more comfortable lifestyle in later life.
Some 41 per cent of employees are not currently contributing to a private or workplace pension, but Antonia’s guidance shows there are simple changes that can provide huge gains in retirement pots.
Apply for Specified Adult Childcare Credits
When a parent gets child benefit, they also get national insurance credits, but if they’re working and someone else is doing the childcare, like a grandparent, then those credits can be transferred, which increases your retirement income if you don’t have enough national insurance contributions.
This little-known UK Government scheme is called Specified Adult Childcare and each year of credit can be worth up to £330 in extra pension income. Over a 20-year retirement, that equates to £6,600. Even better, you can backdate credits to 2011 in the application.
The scheme leaves parents worried and asking questions such as ‘will this negatively impact my own pension entitlement?’, but the great news is that it doesn’t, as they are working, which provides them with the national insurance credit anyway.
Check your workplace pension
A staggering 55 per cent of workplace pensions underperform against industry standards, which could leave workers with an income shortfall when they retire.
It’s vital to take an active interest in a workplace pension to make sure it’s on track for a comfortable retirement.
This issue is particularly acute for women, as only 28 per cent know where their pension is invested compared to over half of men (51%).
And recent government estimates show that women have 35 per cent less private pension wealth than men.
Simply checking a pension regularly (at least once a year) will help workers identify any disappointing returns and take action if they need to change their investment strategy.
Open a Self-Invested Personal Pension
A Self-Invested Personal Pension (SIPP) allows you to have more control over how your money is invested and is popular due to its tax efficiency; all contributions are tax-deductible, and all growth is entirely tax-free. Making it an effective way to save for retirement.
Around 10 per cent of the UK adult population currently hold a SIPP. Statistics over the last decade show that the average self-interest personal pension returns 5.2 per cent per year, compared to a standard default pension, which is between 3-4 per cent.
There is a lot of flexibility when it comes to this pension; you can contribute as much or as little as you want. It is also very effective when it comes to estate planning. You can pass on your pension savings to nominated beneficiaries very easily, which gives good peace of mind to know that your money will end up with loved ones.
Diversify income sources
It’s crucial that when you get to your retirement age, you diversify your income sources. Having this will help protect you from pension shortfalls and market volatility. This can be through state pensions, workplace pensions, investments, and personal savings.
Each income source gives you an extra level of financial protection, as well as comfort during your retirement. If you combine this with being debt-free, then there’s no reason you can’t enjoy a stress-free and work-free later life.
If you invest £200 a month from the age of 25, by 65 you could have a pot of over £459,000 at an average return rate of 7.5 per cent. But if you start at 35, that pot will be £223,000, and it will be just £98,600 if you start at 45.
Debt-free living
One of your main aims before retirement should be eradicating or minimising your debt. Particularly debt with high interest, as having to make regular payments on this could take a considerable amount out of your budget.
It’s also essential to think about your mortgage. If this is paid off before your retirement, then you won’t have to worry about accommodation. On average, the UK population spends 35.7 per cent of its annual income on rent or mortgages alone.
This will improve your financial flexibility, with that money instead going towards essentials like bills, food, and clothing. Whilst still having enough left over to treat yourself in your later years.
Antonia said: “We often don’t want to think about ourselves reaching retirement age. However, assessing the situation now and making small changes, such as checking for childcare credits or how your workplace pension performs, will leave you better prepared when you approach the end of your working life.
“Deciding to start investing a small portion of your monthly income now could leave you with a lot more in your pension pot. That money will allow you to have a more comfortable retirement, or even let you retire earlier than planned.”