As 2010 begins, some people could start the New Year as a time to start planning for the retirement they would like. The long term savings provider believes by setting realistic goals and seeing retirement as an ongoing process rather than an event, people can move closer towards the goal of maintaining their ideal lifestyle in retirement.
A recent study commissioned by Friends Provident revealed the younger generation is already starting to think along these lines by using a range of savings options to fund their retirement – almost two thirds (57%) of 21-29 year olds plan to use property and 43% prefer the flexibility of an ISA. But Friends Provident is warning this may not be the case across all generations.
Martin Palmer, head of corporate pensions marketing at Friends Provident says: “It sounds obvious but taking simple steps to work out the sort of retirement you want, could be half the battle. Only once you have done this can you start planning properly with your IFA how to best reach those goals. For many people a ‘retirement career’ is an attractive way of keeping a moderate income in retirement, whereas for others the plan could be to move abroad – either way, careful advanced planning is required along with a dose of realism. The first step for anyone should be to check whether their current savings are sufficient for the future.”
Top ten saving tips for the New Year are as follows:
1. Check how much you have currently saved for retirement. Talk to your IFA or pension scheme provider(s) to get information, and if you have had more than one employer you should track down what pension entitlements you may have earned from your time in employment. Many company pensions are provided through specialist providers who you can contact directly about the benefits you may have earned. It’s also vital to understand what form any company pensions take – are they defined benefit schemes where the amount you will receive is ‘guaranteed’, or defined contribution schemes, where the pension that will be paid is based on the value of your investments when you come to retire? Understanding what you have earned so far is a big step towards saving enough for retirement.
2. Request a state pension forecast from the Department for Work and Pensions (DWP) and consider if it is worth paying in backdated NI contributions for either yourself or your spouse. If you or your partner are self employed or earn very little, it might be worth considering what NI contributions you pay since some are eligible for a rebate but still provide an entitlement to the state pension at retirement. An IFA or your accountant would be able to help you.
3. Do your homework and swot up on the rules. For example, few people realise that they can receive a greater state pension if they elect to delay receiving the payments by a year – and this holds true for many defined benefit schemes as well. If you can take advantage of private pension provision to provide the income to fund retirement while working part time, you can delay vesting other benefits which will mean they will ultimately pay out more. Similarly, many schemes allow a tax-free lump sum to be withdrawn after the age of 50 (this will be increasing to 55 from April 2010). Again, it’s worth understanding the different types of pension scheme you have to see if this is worth doing – for defined contribution schemes it’s generally a great idea to take as much tax free cash as you can, whereas for defined benefit schemes the calculation is harder since you sacrifice income at a different rate. If you have many pensions, consider maximising the cash from defined contribution schemes but taking 100% income from defined benefit schemes. Again, an IFA would be able to help you make this decision.
4. Use the free tools on offer to you – an IFA or employer should be able to help with the particulars of the type of pensions you have but for general help, the Financial Services Authority (FSA) produces a jargon free guide to retirement options at www.moneymadeclear.fsa.gov.uk.
5. Ensure your pension scheme providers have your up to date contact details especially if you have had more than one pension scheme over the years. Don’t assume that when you reach retirement, that all your pensions kick in automatically. For occupational schemes, the Pensions Register runs a tracing service – just call 0845 600 2537. For private schemes, you will need to get in touch with the financial organisation that you took the scheme out with.
6. Consider what type of income you want in retirement e.g. income drawdown or annuity, and whether you may qualify for an impaired annuity.
7. There are courses available to help people prepare for the impact that retirement has on their life. The earlier you can plan for retirement, the better your finances and the better your health!
8. To move towards a more financially secure retirement, people over 50 should aim to pay off any unsecured debts and consider over-paying on their mortgage to be debt and mortgage free as quickly as possible. Rationalise your monthly outgoings – getting rid of your mortgage is the biggest step to reducing this but in the current climate few are able to afford such a step but even small cutbacks will help to boost your pension pot.
9. Generally, if you start taking income from a pension earlier than intended then the annual income you will receive will be lower, whereas if you delay you will receive higher income payments.
10. Finally, take a look at somebody that you know who has retired, and see if you want to aspire to, or improve upon the financial lifestyle that they have.
Martin Palmer concludes: “These tips may sound simple but saving for retirement does not need to be complicated. Advanced retirement planning ensures long-term security – it doesn’t need to be rocket science.”
