It is never too soon or too late for retirement planning. The earlier you begin investing, the better you are able to plan and the longer you have to save. Investing in a pension or ISA over the long term allows for the power of compounding interest to grow your money quicker. Our recent blog post explains how compound interest can boost your investments.
In this article, we’ll discuss what is meant by retirement planning and key things to consider in your 30s, 40s and 50s.
What is meant by retirement planning?
When planning for your retirement, you need to determine what you want from this time. You should also determine a goal retirement age. With this information, you can calculate how much you should invest now to achieve these goals.
Retirement Living Standards
Pensions UK, along with Loughborough University, release annual figures showing how much income will be required each year in retirement. This is split across three standards of living:
Minimum: covering all essentials, with some left over for fun
Moderate: providing more financial security and flexibility
Comfortable: allowing more financial freedom and some luxuries
The latest Retirement Living Standards annual figures have been released, as below:
Minimum: 1 person – £13,900 | 2 people – £22,500
Moderate: 1 person – £32,700 | 2 people – £45,400
Comfortable: 1 person – £45,400 | 2 people – £62,700
These figures include the amount of income required, after tax, for each living standard. This could be from your State Pension, when eligible, plus private and workplace pensions and any other income streams.
Of these figures, Pensions UK says they expect around 82% of the working population to reach the minimum living standard. This falls to just 23% being expected to reach a moderate standard and just 9% reaching a comfortable standard. These comments reflect that many of the working population are not saving enough for their retirement. This only goes to underline further how important retirement planning is for those in their 30s, 40s and 50s.
Retirement planning in your 30s
Lifetime ISAs (LISA)
Those between the ages of 18 and 39 are eligible to set up a Lifetime ISA (LISA). This is a specific type of ISA for those saving to buy their first home, or for their retirement. Individuals are able to invest up to £4,000 per year until age 50. Contributions will receive a 25% bonus from the government, up to £1,000 annually. The £4,000 allowance is part of the overall annual ISA allowance of £20,000. Unused allowances cannot roll over.
Any interest earned* on LISA investments are also free from tax. Should you invest in a LISA for your retirement, you are able to access the funds tax-free once you turn 60. Withdrawing funds for a reason other than your retirement or buying your first home will incur a 25% charge. This is in order to recoup the government contributions made.
Pension contributions
As an individual in their 30s, you may look to contribute to both workplace pensions (through auto-enrolment or via salary sacrifice) and private pensions. Increasing your pension contributions when you receive salary increases can be a good habit to get into. Arranging this before you are used to the extra income is a great, low impact way of growing your pension pots.
Maximising workplace pension contributions is a tax-efficient means of retirement planning. Minimum workplace pension contributions must total 8% of qualifying earnings. At least 5% must come from the employee (including tax relief of 20% from the government) and the remaining 3% from the employer. Some employers offer contribution matching to a certain level, as an employee benefit. Up to £60,000 may be contributed to an individual’s pension per tax year to be eligible for tax relief, depending on their gross income and ‘pensionable earnings’. You can find out more about your annual pension allowance on the government website.
Money invested in pension schemes cannot be accessed until you are 55 (rising to 57 from April 2028) making pensions a great form of retirement planning.
ISA investments
Whilst not specifically designed for retirement income, ISAs are also a useful tax-efficient investment. Each year, individuals can contribute up to £20,000 per year to ISAs, with limits on the amount that can be contributed to Cash/Stocks & Shares ISAs respectively taking effect from April 2027. Growth within an ISA is free from income tax and Capital Gains Tax, and withdrawals are possible at any time without any tax implications. However as with pensions, the longer funds are invested for, the greater the potential for growth*.
Retirement planning in your 40s
Pension consolidation
In addition to continuing with pension contributions on an ongoing basis, it would be prudent to track down your older pensions. Since 2012, auto-enrolment rules have been in place, enabling more employees to invest for their retirement. An unintended consequence of this, though, is that if you have worked for more than one employer since 2012, you may have multiple pension pots. Whilst it is possible to have more than one pension pot, it can cause an administration headache. This especially the case if you are nearing retirement or when you are looking to start taking an income. In addition, different pension providers have varied rules and benefits, potentially causing confusion. Should this be the case for you, pension consolidation may be the solution.
Pension consolidation is the process of combining pension pots held with different providers into a single portfolio. Admin is reduced, and you are only bound by one provider’s rules, plus your pension pot could be subject to lower management fees. Also, the larger your pension pot, the greater your access to investment opportunities.
There are some reasons why pension consolidation may not be suitable for you. You can find out more in our previous blog post.
We’d recommend a conversation with our experts to determine the best course of action for your retirement plans. Should you decide to consolidate your pensions, we’ll speak to your providers on your behalf, and move your pensions to your Willday account. All we need from you is your pension pot providers, policy numbers, pension value and valuation date – we’ll do the rest.
LISA
If you took advantage of being able to open a LISA in your 20s or 30s, continue to contribute as much as possible, within your annual allowances. It is possible to continue contributing until you are age 50.
If you do not use the monies within a LISA to fund the purchase of a first property, you can use them as an additional form of retirement income. However you must wait until age 60 to be able to draw from it without penalties.
Tax efficiency
By your 40s you may be earning more than you did previously. It becomes evermore important, therefore, to ensure tax efficiency opportunities are taken. You should ensure, where possible, that pension and ISA allowances are used, should you have funds available to do so. If your employer offers pension contributions via salary sacrifice, this can save you tax. In April 2029, changes are being implemented which reduce how much you are able to salary sacrifice into your pension without being subject to National Insurance. Read our recent blog post to find out more.
Retirement planning in your 50s
In your 50s, you may feel you’re too close to retirement age to make any difference to your pension pot. It’s never too late, though. Any size of pension pot is better than no pension pot at all. Also remember, even if you leave it until age 55 to contribute to a private pension, if you aren’t planning to retire before State Pension age, you’ll still have at least 12 years of pension contributions.
You can check the current state of your pension pots using a pension calculator. This will enable you to see if you are on track to meet your previously defined retirement goals. From this you will be able to make important decisions about what your retirement may look like using up-to-date financial information.
Pension drawdown
State Pension age is currently in the process of transitioning from 66 to 67. By 2028, it will be 67 for anyone born before 5th April 1977. In the future it is likely to rise again. You can check your State Pension age on the government website.
You can often draw down from private and workplace pensions from the age of 55, if you choose and depending on your pension provider. This will rise to 57 from 2028. Should you choose to remove money from your pension pot, you can take 25% tax-free. The remaining 75% will potentially be liable to tax at your highest marginal rate. You can take both the tax-free cash and taxable elements of the pension in a single lump sum, or in instalments. Alternatively, you may choose to leave the money invested, to grow further*. It is important to remember that the more of your pension pot that you take before retirement, the less will be available in your later years.
How Willday Wealth Management can help
Willday Wealth Management will help with your pension needs every step of the way. Our team of experts is on-hand to help you build a portfolio of investments to help you reach your retirement goals. We’ll make sure your money is working hard for you in a tax-efficient way. If you tell us when you aim to retire, we’ll manage your portfolio around your target date. This means we can lessen the risk of your pension and ISA investments as you approach retirement.
Arrange a consultation with our team by calling us on 0116 222 0119 or emailing hi@willdaywm.co.uk.
*With investing your capital is at risk and you may get less than what you invested
