How to plan your pension

by John Fitzsimons on 27 April 2011  |  1 comment
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Guest blogger Philip Brown looks at the things you should consider when planning your retirement savings.

Saving for retirement is one of those subjects that everyone knows is very important yet we rarely discuss it – there are a variety of reasons for this. It may seem less important than current affairs, what is happening in the wider world - or we just don’t find it an interesting or ‘sexy’ subject.

Don’t worry, I’m not going to try and ‘sex up’ retirement savings. But I do intend to highlight the issues that should be influencing the amount you save.

As some background it is worth noting that 80% of an individual’s pension’s savings or funds are less than £40,000. It may seem like a fair bit of money – but ask yourself whether it will last you 30 years or more? Remember, we are all living longer these days.

Things to remember

There are a couple of things you need to be really clear about when planning your retirement.

Firstly, consider the main choices you are making regarding your retirement savings – you are basically aiming to accumulate a fund which is sufficient to provide for your income needs and retirement aspirations.

Secondly, you are not choosing the particular retirement income you need as that may be 20, 30, or even 40 years away - and your priorities may have changed significantly during the intervening period.

Your retirement date may also change.

Focus on your needs

Any retirement planning and savings process should involve diligent research. You should certainly consider using an independent financial adviser (IFA), as expert guidance can clear a path through the myriad complex choices to you.

The options may seem daunting but the important thing to consider here is to focus on what you need from a financial product.

Many people opt for personal pension plans, for example, as well as their work-based pensions. More complex products, such as ‘Self Invested Personal Pensions’, offer considerably wider investment choice, but are only really suitable for a relative minority with significant funds under investment.

Charges are a crucial consideration: most people seem to ignore what they pay for financial professionals to manage their pension plans – but it is important to put these under the microscope, as they can really add up over the years.

Related how-to guide

Start a pension

We all need to consider how we’re going to pay for our lifestyle in retirement. Follow these simple tips for how to get started.

See the guide

Family circumstances have a huge significance on the choice you make regarding your savings. If you are in a relationship, think about which of you is the main earner and what your wife/husband or civil partner has in the way of retirement savings.

Inflation is an important consideration over the life of your savings’ plan, and if possible you should seek to outpace inflation as you grow your savings pot.

An income in retirement

A key point is that planning for retirement is not simply about accumulation. It is critical that you make the right decision about converting your pension plan/funds into a retirement income.

For example, shopping around for the best annuity (the name for the financial product which converts your accumulated pension/capital/savings into a retirement income) is arguably the most important financial decision you will make when you reach this stage of your life.

The difference between the best and worst annuity rates can be up to 20% or more, if you are one of the 40% of all retiring people who qualify for an ‘enhancement’ (that is, more money) for health or lifestyle reasons. For more on picking an annuity, have a read of Don't miss out on a richer retirement.

Finally, don’t delay. If you delay retirement planning remember you are losing valuable ‘tax breaks’ in the form of additional payment to your pension from the tax man. It’s worth keeping in mind that the longer you allow to invest your retirement savings the better potential there is for positive investment growth. 

Philip Brown is head of retirement products at retirement specialist Partnership.