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Where to Start With Your Retirement Planning

Richard Beardsworth Pension Expert

By Richard Beardsworth.

Independent Financial Advisor

More Reading on Pensions...

Retirement planning; how often do you think about it? Whether you are 21 or 61, the reality is that you are unlikely to be able to continue working until the day you die. Almost all of us will eventually reach a stage in life, barring premature death due to accident or illness, when age simply does not allow us to be as financially productive as we once were. Therefore, retirement planning is critical.

You have likely heard financial experts of all stripes talk about retirement planning on television, on radio, and even online. You may have noticed that most of them recommend getting a plan in place as early as possible in your working career. This is not without reason. The average worker will need to have saved in excess of £100,000 by the time retirement rolls around to sustain a reasonably comfortable lifestyle. For a worker who only earns £25,000 annually, saving that kind of money is difficult enough on its own. Waiting until you are 40 or 50 to get started only makes the task more difficult.

Having said all of that, starting your retirement planning at age 40 is certainly better than not planning at all. Every year you work is another year you can put some money away toward your retirement. The question is, where to start?

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Retirement Goals and Desires

The most obvious place to start retirement planning is to assess your goals and desires for the future. Why? Because there is no way to determine the best means of generating retirement income until you know how much income you are looking for. You need to sit down and honestly assess the following:

  • Debt Load – The one goal common to all retirement plans is the ability to pay one's bills in retirement. In order to know that, you need to understand your current debt load. For example, do you have a mortgage? If so, will you still be paying for it after you stop working? Every bill you have to pay in retirement will require income to cover.
  • Retirement Activities – Next, it is good to have an idea of what kinds of activities you want to participate in during retirement. Some people like to travel, others are all about playing golf, still others have a long list of hobbies they have been waiting to get into. All of these things cost money.
  • Lifestyle – Lastly, one must consider the overall lifestyle to be pursued in retirement. You can choose to be extremely frugal, extremely lavish, or somewhere in between.

<p.Once you have an idea of your goals and desires for retirement, you should be able to work out how much money you will need on a weekly and monthly basis. Then it is a matter of saving and investing today in order to make sure you have that income tomorrow.

Pension Investing Options

A 21-year-old worker sitting down with a certified financial planner is likely to be steered toward pension investing first. There are two reasons for this. First, new auto-enrolment rules that began rolling out in 2012 now require virtually every employer in the UK to enrol eligible employees in a qualified pension. By the end of 2018 the vast majority of full-time UK workers will either be enrolled in a pension or have specifically opted out.

The second reason for steering young workers toward pensions is the fact that they are relatively stable. Indeed, additional investments with more aggressive options will probably be recommended above and beyond the pension, but the pension will provide the basis for most financial plans among young people.

For the purposes of this discussion, there are three kinds of private pension plans workers can choose to invest in. These are:

  • Occupational Pension – The occupational pension is a pension scheme set up and offered by an employer. Such a scheme can be either defined benefit or defined contribution in its structure. All workers enrolled in an occupational pension fund through auto-enrolment rules enjoy contributions from their employers.
  • Stakeholder Pension – A stakeholder pension is a personal pension that may or may not be offered through an employer. It is known as a personal pension because it is established via a contract between the pension saver and the pension operator, exclusive of any employer participation.
  • SIPP – The SIPP is also a personal pension that is self-invested. It is established directly by the pension saver through a bank, insurance company, or specialist pension operator. SIPPs are never offered through employers.

The stability, employer contributions, and tax relief of workplace pensions suggest that they are the best vehicle to provide a firm foundation for retirement planning for most younger workers. However, you should not be afraid to talk about a stakeholder pension or SIPP with your financial planner. One of the other two options might be better suited to your circumstances.

Understand the State Pension System

The state pension should also be part of the retirement planning discussion. At the very least, every worker should fully understand how the system works for the average employer. The state pension will contribute some retirement income, but not enough for you to depend exclusively on it to enjoy a relatively comfortable lifestyle once you stop working.

Under the new state pension system set to take hold from April 2016, you will need at least 30 years of combined National Insurance payments to get the full basic state pension weekly payment. Right now that payment is pegged at £155 per week; it is subject to adjustments in relation to consumer prices and inflation.

Other Retirement Planning Considerations

You may sit down with your financial advisor only to discover that your 5% contributions to your workplace pension will not be enough to help you realise your goals and desires for retirement. What do you do from there? That depends on the anticipated shortfall and the amount of income you currently have to work with.

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It might be that your financial advisor encourages you to continue contributing to your workplace pension while also opening a secondary stakeholder pension. The beauty of the stakeholder pension is that you can contribute on your own schedule. Furthermore, pension operators are required to set their minimum contribution limit no higher than £20. The management fees associated with the pensions also make them attractive.

Your financial planner may advise you to forget about a second pension plan and, instead, invest extra money in one or more securities. He or she might recommend an investment in certain stocks along with additional investments in corporate or government bonds, for example. The idea here is to take the income you currently have to work with and put it into investment opportunities that will provide the kind of return you need to reach your retirement goals.

Of course, there are also other considerations, including life insurance. Yet even life insurance can be used as an investment if you purchase a whole life policy rather than term insurance. Whole life insurance allows you to begin using some of the investment returns attached to your policy in retirement without affecting your guaranteed death benefit.

There is certainly a lot to consider when it comes to retirement planning. It all starts with knowing what your goals and desires for the future are. If you have not yet put a retirement plan in place, we urge you not to wait too long to get started. It is true that every year you contribute to a retirement plan is another year of putting away money to fund your retirement. But it is also true that every year you delay is one less year you have to build up a comfortable nest egg.

Retirement planning does not have to be uncomfortable or difficult in order to be effective. We encourage you to seek out the services of a certified financial advisor who has experience with retirement planning, pensions, etc. Also feel free to take advantage of all of the free guidance offered by the government. The more you plan your future, the better your future will be.

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