Read our three golden rules for a better retirement.
Let’s get the obvious one out of the way here: make sure you save enough.
Actually, it’s not that obvious, because what’s enough? Especially when there are more urgent priorities for your finances, such as mortgages or childcare expenses, saving for a house deposit, or having a life.
The ‘25x’ rule of thumb is useful here. You think about how much you’d like your annual retirement income to be, and multiply it by 25 to work out how much you need.
There are plenty of online tools to calculate how much you should save each year to get this – depending on your age and when you want to retire.
Make sure you don’t save too much. Yes, seriously.
It’s a nice problem to have, but it’s still a problem. And potentially a really expensive one.
There’s a ‘lifetime allowance’ of £1.03m for your total pension funds, which may feel like a fantasy figure, but a surprisingly large number of people come close to it. Exceed it and you’ll face a hefty tax charge.
Another important allowance to know about is the annual pension allowance of (currently) £40k, after which tax relief stops. However, those earning over £150k have their £40k allowance reduced incrementally – down to £10k for some.
In addition, each year’s Budget is the subject of numerous whispers about scaling back pensions relief.
So, all in all, there are red flags all over the place, and everyone’s circumstances are different. Remember that tax rules can change and taxation will vary depending on individual circumstances. You should seek pensions and tax advice if you’re not absolutely sure.
Don’t assume there’s safety in numbers.
The days of a job for life and the retirement gift of a nice-but-dull clock are long gone, thank goodness. But if you change jobs every 3 or 4 years, you can end up with ten or more historic pots.
Which means 10 sets of ongoing paperwork, and 10 sets of performance and charges to monitor. With everything distributed in this way, you’re more likely to save too little or too much.
Another problem associated with having multiple pots and schemes is a lack of diversification. That’s because each pot may invest in broadly the same assets as each other – for example, they may all have a Sterling bias, as will your home, salary and cash savings. By not diversifying, you end up overweight in Sterling, and vulnerable.
A better solution may be to combine your pots into a personal pension, which could save money on fees, and be the first step to managing diversification.
One thing, though: before rushing to jettison historic pension pots, check whether you’d also be dumping great benefits such as guaranteed annuity rates or maturity values.
Retirement planning is complex and unglamorous, but we do have more choice than ever before. The opportunities are there for a really great financial future and retirement, and it’s worth speaking to a professional to plan for the future you want.