Penguin Wealth’s Quick Guide to Financial Freedom Planning

01 Aug 2019 | Articles |

Having a pension is a milestone of adult life that everyone hears about, but many understand only in broad brushstrokes, much like home insurance, taxes and fixing leaky pipes.

We know it’s hard to cut through all the noise and menacing-sounding warnings about spending your old age in poverty. That’s why we put together a quick, no-nonsense guide explaining how pensions work.

What is a pension?

Put simply, a pension is one of the most tax efficient ways to put money aside for retirement. As a rule of thumb, the sooner you get started on your pension, the bigger the pot of money you will have when you stop working full time. That, in turn, equates to more trips with your loved ones, comfortable living arrangements and never lacking for anything.

As one of the most popular types of retirement planning, a pension entitles you to a guaranteed monthly income when you reach retirement age. There are a number of different pension types available, some set up by your employer and some set up directly by you, so you can choose the one that best suits your financial circumstances.

Broadly speaking, government organisations usually tend to offer a pension scheme, and so do most medium and large businesses. If your company offers a pension plan, your employer would be contributing money to your pot while you are working. You are also free to save into more than one pension scheme and use alternative tax-efficient retirement plans.

How much is a good pension?

How much your pension income is when you retired is calculated based on the amount you contribute during your working life. Research conducted in May 2018 by Royal London looked into the question of how much is a good pension, and placed the size of the pot at approximately £260,000 for comfortable retirement. This averages just above £9,000 annually on top of the state pension of £ 8,767.2.

Depending on who you ask, this number can jump up to anywhere between £10,200 and £40,000 annual income. Either way, the consensus is that you need retirement planning in addition to the state pension to lead a comfortable life.

How long to save for retirement

With auto enrolment into a pension scheme being introduced, more people in their twenties and thirties have started saving earlier. People aged between 25-34 who have been contributing to their pension pots in line with the auto-enrolment contribution amounts assigned by the government, are estimated to save between £126,784 and £142,836 by the time they reach retirement age.

People who start retirement planning at their forties, meanwhile, tend to retire with pension savings averaging at £60,000 (or a monthly sum of approximately £250). If you only start contributing to a pension pot in your fifties, you would need to save nearly £1,500 monthly in order to have a £23,000 annual income during your retirement.

What is the retirement age in the UK?

Currently, the retirement age in the UK is 65, after which point you are entitled to state pension. This is set to increase to 66 years by October 2020, and then jump further up between 2026 and 2028, reaching 67.

What is a pension transfer value?

You can transfer one or all of your pension pots to a different provider – this can help you simplify your contributions process, save you money on fees or give you more choice when it comes to pension scheme options. You would also transfer pension pots if you are moving to a different country if you want to contribute to a local pension scheme.

If you’ve changed jobs over the course of your employment history, you would have likely contributed to more than one defined contribution pension pot. A pension transfer combining all of these into one main pension pot makes your retirement planning much easier, and does away with the need to pay fees for each scheme individually.

The amount your pension would be worth if you changed providers is know as a pension transfer value. Comparing you pension transfer value to your pot value is an easy way to determine whether your current provider charges an early exit fee.

How to find old pensions

Tracking down all the different pension pots you’ve contributed towards is important to just for transfer purposes – you want to make sure that when you retire, you are claiming all the money you are entitled to. The UK government offers a free Pension Tracing Service which helps you track down old pensions using the names of past employers or pension providers.

How to plan your retirement income

When it comes to retirement planning, there are a number of different options available, including owning a second property, but the most popular one remains having a pension. When compared to other options, putting your savings in a pension pot for retirement is safer and allows you to raise more money as extra income.

We recommend making pension contributions one of your priorities when it comes to financial planning, alongside other key parts of your life such as running a business, travel and/or the education of your children. Ultimately, this will help you ensure that when you retire, you have the means to live as comfortably as you do now.

Speak to our Financial Planning experts about your pension requirements.

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