The great news for those of us over 50 is that we have a lot to look forward to. On average we will live longer than previous generations. Not only will we live longer but we will be healthier and more active into our old age. We will have the ability to travel, start new hobbies and interests, continue with or take up sports and so on, in a way which would have been unimaginable to older people in the past.
However, despite big innovations in the pensions landscape such as auto enrolment, recently published data from ONS shows little change over the last decade in the preparedness for retirement of the UK population.
Thinking about pensions can seem to be complex minefield. There are multiple things to get your mind around. State pensions, private pensions, tax issues, lump sums, annuities and a whole range of jargon covering things you don’t have to understand in other parts of your life. All of this can just be overwhelming.
Data for 2010 to 2012 showed that 43% of the population thought they had enough understanding of pensions to make decisions about saving for retirement. This week ONS published data for 2018 to March 2020. This showed little overall improvement, with 44% thinking they understand pensions enough.
However, this fairly static overall position hides a two important trends.
First, managerial and professional staff and especially those working for large employers are now much more confident that they understand pensions. This is probably a testament to employers investing more time in making sure staff understand their schemes.
Secondly, during the last 10 years low incomes have increasingly been cited as the reason people are not contributing towards a pension. In 2010 to 2012 just over a third mentioned this reason. In the current survey this has risen to more than a half with important regional variations. In the economically depressed North East of England 61% people said their income was so low they couldn’t contribute to a pension.
That’s the main reason that many people put off thinking about pensions when they are younger. Retirement seems a long way off and they are busy building careers, rearing children and so on. It is easy to continue this habit in later life.
Paul Green from over50smoney commented: “While overall the ONS data suggests little movement in the UK populations preparedness for retirement there is a growing social divide. Well educated people in good jobs understand pensions more than ever and can afford to contribute to one or more schemes. However, low income groups are increasingly being squeezed out of pensions as they struggle to make ends meet. The impact of COVID-19 will make matters worse over the next few years. Increases in unemployment and numbers in low paid jobs will leave people unable to contribute to a pension.”
Simple steps to help you sort out your pension
These simple steps will help get you started in understanding your pension needs and taking the actions needed to build the pension you want.
Work out how much money you need to live on when retired
The best place to start this is by looking through your bank statements. This will help you understand your current expenditure patterns. Doing some analysis will help you understand how much you spend on key areas such as:
- Energy bills
- Cars including insurance, fuel etc
- Other Insurance, for example home
- Food and other household expenses
- Phones, broadband etc
- Entertainment, eating out, socialising and so on
The important thing is that you understand where you are currently spending your money. Once you have a good view on this you can assess how this is likely to change when you retire. The sorts of things to consider are:
- Whether your housing costs will go down. If you have a mortgage this may be paid off before you retire but you will still need to pay council tax and insure your home.
- Will your day to day travel costs reduce as you cease commuting to work on a daily basis?
- Do you think your holiday costs will increase as you have more time to travel?
- Be thoughtful about how you (and any partner) will spend your time when not working and what the cost implications of this will be.
- Once you have done this you should have a good understanding of whether your estimated pension income will cover the costs of the lifestyle you would like to have when retired.
Plug any pension shortfall
In many cases over 50s find that the lifestyle they aspire to in retirement is more expensive than can be afforded on the savings and pensions they have.
This means that action needs to be taken to plug the projected shortfall as far as possible. Remember the younger you are when you start to do this the easier it will be to build the pension value you need.
The two simplest solutions to plug the shortfall are as follows.
- First, if you can save more. Be as strict with your expenditure as you can. Where possible switch to cheaper providers and only spend what you need cutting out discretionary expenditure. If you are in your 50s or early 60s dedication to saving more can make a noticeable difference to the value of your pension. See our list below for more of an idea.
- Secondly, consider delaying your retirement for a few years if you can. Extending the amount of time before you draw your pension can also significantly increase its value.
How to continue to build a pension pot
Most people repay their mortgage in their 50s, which is why the age of 50 to 60 is the most important for pension planning. Decisions in this decade can still have a big impact and keep you in control of the journey between work and retirement. But if you haven’t been putting money aside before now, then that thought might be making you uncomfortable – but don’t worry – you’re not alone!
According to research by Sunlife only 9% of people in their 50s are confident they have enough in savings, investments and pensions to fund their retirement; a further 32% say they ‘hopefully’ have enough, with a 36% saying they definitely don’t.
It was suggested that while the average pension pot for 79% of those surveyed was £146,666, the remaining 21% of those in their fifties did not have any private pension provision at all.
How much do you need in your pot?
There are different ways of calculating this. According to The Pensions and Lifetime Savings Association, a moderately comfortable retirement that includes basic spending and a good European holiday each year, needs £20,200 per annum per person.
Governments around the world are increasing the age when their populations qualify for state pension in order to help them balance their books. When my parents retired my mother qualified for her state pension at the age of 60 and my father at 65. Now in the UK, the Pensions Act 2014 has increased the state pension age to 67 for both men and women. This increase will be phased in between 2026 and 2028. Looking further forward the Pensions Act 2007 adds an extra year to 68 starting in 2044.
If you want to know what your state pension forecast is, you can follow this link https://www.gov.uk/check-state-pension and it will let you know when you can get it
and how to increase it, if you can. Bear in mind that the the state pension age is under review and may change in the future.
So how else can I build my pension pot?
Dump the debt! You do not want to be taking your credit card debt and mortgage with you. According to research from Hargreaves Lansdown, paying off your mortgage at age 50 and redirecting the average monthly mortgage payment of £633 into a pension could potentially provide an extra £218,548 in retirement.
The current pension tax system rewards those who make their contributions whilst they are higher and additional rate taxpayers – much more likely in your 50s than your 20s or 30s. So for basic-rate taxpayers it is 20%, for higher-rate taxpayers it is 40% and for additional-rate taxpayers it is 45%. Therefore, if you are a basic-rate taxpayer and contribute £100 from your earnings into your pension pot it will only cost you £80 because the government will pay £20 (which is the tax you would have paid on the £100 of your salary).
Delay taking your pension
There’s no hurry to start taking your pension if you don’t need to and in fact there is a building trend to delay taking one. If you are lucky enough to have sufficient income to live on, then this might make sense. However, there are issues around this for private pensions – in particular whether restrictions apply or if you’ll lose income guarantees. There may also be hidden charges for delaying, and of course the value can rise or fall so remember to review the situation regularly. Finally, it could possibly affect your future tax or entitlement to benefits such as long-term care costs.
Your State Pension will increase every week you defer, as long as you defer for at least 9 weeks, by the equivalent of 1% for every 9 weeks you defer (5.8% for every 52 weeks).
According to Sunlife those with low pensions should look to equity release as people in their 50s have seen their homes increase in value by around £133,000. The money is tax free, there’s no need to downsize and it can be used however you choose to spend it. Equity Release doesn’t typically get invested as part of your pension but the money is used to boost your income alongside your pension.
Invest the money within your pension so that it grows over time. The best way to do this is to put your money to work in the stock market through either investment funds or individual shares. Over the long run, the stock market tends to generate returns of around 7%-10% per year, meaning that it can boost your wealth significantly over time.
For example, let’s say you saved £500 per month from the age of 50 into a pension, picked up 20% tax relief (taking your annual savings to £7,500) and then generated a return of 8% per year through the stock market on your money. According to my calculations, by 67, your pension would be worth over £250,000. That’s certainly not a bad result from savings of just £500 per month, starting at 50.
Paul Green added: “The uncertainty caused by the Covid-19 pandemic means that it is critical we understand how prepared we are for retirement. People between the age of 50 and 65 could struggle to build the pension contributions they need if they lose their income. It makes sense to understand the value of your pensions and investments now and then take all steps needed to boost these to the levels needed. If you are younger and not contributing to a pension do everything you can to prioritise this. Don’t view your pension as a luxury but part of your standard monthly expenditure.