Rising to the retirement challenge
Will you take the steps in 2019 that move you closer to financial freedom?
The months of January, February and March are a good time to take stock and make plans for the coming year. It is also an opportunity to get a better picture of what your ideal retirement will look like – and how much it will cost.
You should firstly review which pension assets you have, how they are invested, and what they are all worth. This will help you better understand how much you need to save to bridge the gap between your income and your expenses during retirement.
That might sound obvious, yet, research suggests that only half of UK adults with a defined contribution pension have read their annual pension statements, and only 18% have reviewed where their pension is invested.1
Data from the Financial Lives Survey and Retirement Outcomes Review, both conducted by the Financial Conduct Authority, highlight the continued challenge of ensuring savers fully connect with their retirement savings. A lack of engagement means that the prospect of individuals not having adequate income – or, at least, the level of income they expected – in retirement remains a very real one.
“There’s still a long way to go in terms of raising awareness,” says Ian Price, divisional director at St. James’s Place. “It’s vital to realise that building a decent retirement pot means being engaged with the process early and taking advice at appropriate times.”
The good news is that participation in workplace pension schemes continues to rise, driven mainly by automatic enrolment. Almost ten million people are now saving in workplace pensions as a result of the auto-enrolment regime begun in 2012.2
However, there is still lots to be done. In April this year, the auto-enrolment minimum contribution rate will rise to 8% of qualifying earnings (of which at least 3% must be paid by the employer), but that is still too low for many to be able to look forward to a well-funded retirement.
Earlier this month, the Financial Conduct Authority restated its concern that “consumers may assume that making the current minimum contribution will yield sufficient savings to support them through retirement when current evidence suggests this is unlikely to be true.”
It also expressed concern for the self-employed, who continue to fall outside auto-enrolment’s remit. In the last decade, pension saving among the self-employed has dropped from 30% to just 14%.3
“Given that auto-enrolment for the self-employed isn’t expected anytime soon, the onus is on business owners themselves,” says Price. “Although the self-employed are not automatically enrolled into a workplace pension, that shouldn't stop them from making tax-relievable contributions to their own plan.”
Live long and prosper?
Just as people tend to misjudge how much money they can count on, so too do they miscalculate the repercussions of other risks, such as how long they might live.
Today, a 65-year-old man in the UK has, on average, another 18.6 years of life ahead of him (up from just 13 years in the early 1980s), while 65-year-old women will live another 20 years plus.4
To reflect these changes, the government is proceeding with an accelerated increase in the State Pension age. This year, the State Pension age will start to increase for both men and women to reach 66 by October 2020. It will then increase to 67 between 2026 and 2028, and it will be linked to life expectancy after that.
Exactly how far and how fast life expectancy will increase in the future is a subject of some debate, but the impact is clear: without a robust plan, people run a greater risk of outliving their financial security.
“It’s easy to put saving to the bottom of the pile, especially when you have other financial commitments, but rising life expectancy is a good reason for getting to grips with retirement planning,” says Price.
The fact remains that the best way to help secure a comfortable retirement is to save as much as possible as early as possible in your working life, and to make the most of any tax breaks in the process.
The end of the tax year is often seen as a crucial time, as it provides the final opportunity for individuals and couples to take advantage of tax breaks that would otherwise be lost. Therefore, everyone should try to make full use of their pension allowances and reliefs before the end of the tax year on 5 April.
By taking advantage, you are not only maintaining a financial foothold, but potentially moving one step closer to the retirement lifestyle you seek.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
1 Financial Conduct Authority, Sector Views, January 2019
2,3 Department for Work and Pensions, Automatic Enrolment evaluation report, December 2018
4 Office for National Statistics, National Life Tables, 25 September 2018