Pension advice from Positive Advisers in deciding how much to put into your pension is a very personal matter. It will depend on your income now, your disposable monthly income after paying all your bills, your aspirations for retirement and most importantly your age.
I will use the below step by step guide to show you how as an adviser firm we work with our clients to build a bespoke plan. The in the example you will see the huge difference is makes depending on the age you start saving.
The steps to building a plan
First, we help our clients establish what state pension will be available and what age this will start.
The current state retirement age is 68 but if your closer to retirement your age may be slightly earlier as the government is phasing in extending the retirement age to 68. The government is under financial pressure to extend this retirement age further.
To ensure your plan adjusts to any future changes we offer all our clients an annual review service to keep you on track and ensure you are kept up to date with any changes. A full state pension is currently £175.20 per week or £9110.40 per year.
You must build up sufficient national insurance contributions to qualify for the full state pension. We ask all our clients to get a free personalised illustration of their state pension from the government portal https://www.gov.uk/check-state-pension.
The next step is to set a retirement date and target income
When considering a target income, we look at current spending and adjust for expected changes. Changes might be that your mortgage is fully repaid, your travel costs are less not having to go to work, or you want more holidays in retirement.
We consider longevity in your family and your own personal health. How old where your grandparents or parents when they died? If you do not have a strong expectation of life expectancy, we can use the Office of National Statistics life expectancy (ONS). The current ONS figures show a man can expect to live to 79.2 and a woman to 82.9.
We now have:
- Your current age
- Your desired retirement age
- Your life expectancy so how long you will want or need income for approximately
- Your expected state pension amount and start date
This enables us to calculate a shortfall in income that you need to make up personally. The software we use factors in inflation and allows us to pick an assumed growth rate which we match to the level of investment risk you are comfortable investing with. We use the latest technology to produce a report for our clients.
The report will show how much money you need to build up in your fund to achieve your goal and most importantly how much you need to invest each month.
An example
Let us say we are trying to achieve a retirement income of £20,000 per year in today’s terms at age 68. By today’s terms I mean factoring in inflation, so it has the same spending power as £20,000 today.
Our assumptions for the example:
- Let us assume the state retirement date is 68
- Let us assume the state pension is the full £9110.40
- Let us aim for a mortality age of 88, so our lucky example person lives 5 years longer than the average female and 8 years longer than the average man.
- Let us assume we can achieve an average growth rate of 5%
- Let us assume inflation runs at an average of 2%
- Finally let us assume that our example person will increase the amount they pay into their pension each year in line with the Retail Price Index (RPI Inflation). As the cost of living increases and hopefully income the payment into the plan will also increase.
If we need £20,000 and the state is providing £9110.40, we need a pension fund big enough to provide us an income of £10889.60.
Below are the stating monthly payments required into a pension at different starting ages to achieve the goal:
- From age 20 you would need to save £130 per month (RPI Linked)
- From age 30 you would need to save £197 per month (RPI Linked)
- From age 40 you would need to save £319 per month (RPI Linked)
- From age 50 you would need to save £587 per month (RPI Linked)
Summary
The moral of the story here is the younger you are to set a plan or goal and start working towards it the less it will cost you each month. The later in life you start the harder you will have to work to achieve the goal. If you leave setting a plan to late you may not be able to achieve your goal and then must settle for a retirement below your expectations.
Contact us today to book a review to build a plan to ensure you have the retirement you are hoping for. We offer a free initial consultation, so you have nothing to lose.
Warning
Our services relate to certain investments whose prices are dependent on fluctuations in the financial markets beyond our control. Investments and the income from them may go down as well as up and you may get back less than the amount invested. Past performance is not a guide to future performance.
