Plan your pension now to avoid a bleak future

Research released this week has revealed that a quarter of British consumers believe that they will have to work beyond the age of 65. And the reality is that they are probably right. If you wish to live out your later years in comfort, you need to start preparing now.

The results of a survey conducted by Aegon earlier this week show that 20% of British people have no pension plans in place. Meanwhile, 43% believe that they are not saving enough towards their retirement.

“We’ve reached a point where a retirement income won’t happen by accident, you need to make it happen,’ says Tom McPhail, head of pensions research at Hargreaves Lansdown in Bristol.

And when you consider that the current state pension for people with no private savings yields a monthly income of just £500 a month, you would have to agree.

“There will always be a state pension but it’s really not something you want to have to rely on. Anyone who is in a position to save any surplus income from their monthly wage should do so. And the earlier the better,’ says McPhail.

So if you have not started planning for your retirement, you should do so immediately. This may seem complicated or expensive, but the long term benefits can not be emphasised enough.

“It’s not nearly as complicated as people think. It’s not that hard to get some answers if you go online. There are a whole variety of pension calculators available on the internet. These will give you a clear indication of what kind of savings you will need to make,’ he adds.

Your first step should be to figure out what kind of income you would like for your retirement years. Then look at what savings you have in place and work towards bridging the gap between what you would like to have and what you are currently on course to achieve.

“Everyone has to find their own level as to what they are expecting from retirement. Indeed, I think that this is a really important starting point in pension planning. You should look at your current income and try to project yourself into the future. Make some sensible assumptions about whether you’ve paid off your mortgage and whether you’ve still got kids living with you. Figure out what kind of income you would like in retirement relative to your current income,’ says McPhail.

As a general rule of thumb, the average individual should be aiming for a retirement income of at least 50% of their pre-retirement income. If, for example, you are 35 years old with an annual income of £30,000, you would need to set aside 15% of your earnings to achieve this. In this case, your private pension would yield an annual retirement income of £10,000, and you would get an extra £5,000 from the state – a total of about £15,000.

If, however, you began making the same pension contribution at the age of 30, your annual retirement income would be in the region of £19,000. So the sooner you start, the easier it will be.

“The research shows that people realise that they are not doing enough to prepare for retirement. Yet on the other hand there is a significant slice of the population who think they might be able to retire early or at least by the age of 65. I think the reality is that a lot of people will have to work beyond the age of 65,’ adds McPhail.

If you are lucky enough to be offered a pension scheme by your employer, grab it with both hands. Many employers will contribute to these schemes so this is as good as free money for you.

If not, seek the advice of an independent financial advisor. This will help you get an idea of where you want to be when you reach retirement age and what you need to do to achieve it.

As it stands, many British consumers will be faced with a tough choice when they reach retirement age: whether to work past the age of 65 or endure a significant drop in their standard of living. We advise you to act now if you want to avoid having to make this decision.

We’ll leave Tom McPhail with the last word: “As a nation we are spending a bit too much and not saving quite enough. Even if it means sacrificing that Starbucks coffee in the morning it will pay to compromise on a few luxuries. A little saving now will go a long way in the future.’

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