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Pension health check: five things to do this year
It's time to look at your pension and whether you can afford to live comfortably in retirement.
by Michelle McGagh on Jan 04, 2013 at 16:55
It’s no surprise that we will have to be more self-sufficient in old age and stop relying on the state, so as 2013 begins it’s a good time to think about what you need to do to secure a comfortable retirement.
Julian Webb, head of retirement savings at Fidelity Worldwide Investment, said a pensions health check should make it to the list of New Year’s resolutions, and there are five major areas you should look at whether you are a new pension saver or already saving.
As part of the government’s plan to get us saving more for our retirement, it launched auto-enrolment in October last year. This will see up to eight million workers put into a workplace pension scheme, although they will be able to opt-out.
Webb said for most people it would be the wrong option to opt out.
‘For most people…if you are not already part of your workplace pension scheme then it’s highly likely you will be soon and for most people staying enrolled is the best option,’ he said.
Auto-enrolment will be phased in over the next few years but Webb said those not saving should join their workplace pension earlier rather than wait to be auto-enrolled.
‘You should also consider joining your company’s pension scheme voluntarily, rather than waiting to be auto-enrolled, as you could benefit from £10,000 more in employer pension contributions over a decade.’
For someone earning £26,200 a year they could receive £15,614 in pension contribution if they contribute 2.8% of salary and the employer 6.6% over 10 years.
A person on the same salary contributing the auto-enrolment minimum of 1% for employer and employee from 2012 to 2016, and 3% from the employee and 2% from the employer in 2017, and 5% from the employee and 3% from the employer from 2018, would contribute £6,060 over a decade.
Multiple pension pots
How many pension pots do you have? Webb said if you do not know the answer to that question then you need to find out. The average person has 11 employers over their working life, and that’s a lot of pensions to keep track of.
‘You should make sure that you don’t forget about your pension pots, not matter how small,’ said Webb.
It may be worth consolidating your pension pots into one pension, although this will come at a cost; you will need to pay a professional to do this for you and may have to pay a penalty for exiting a pension scheme.
‘Consolidating your pension pots could help you keep track of your pension savings and give you more control over them,’ said Webb.
If you have lost track of your pension, which isn’t uncommon, you can track them down via this government website: www.gov.uk/find-lost-pension
How much are you contributing?
If you are contributing to a workplace pension, it is a good idea to review how much your are putting in each month – maybe you have had a pay rise but have not increased your pension contributions.
Many employers will match contributions that employees make to their workplace pension.
A 25-year-old man on average earnings of £26,200 who contributes 5% of salary into a company pension schemes, and whose employer is matching contributions, could receive an annual retirement income of £21,000 at today’s annuity rates.
Is the state pension enough?
The coalition has plans to increase the state pension to £140-a-week but this is still only roughly the equivalent of working a full-time job on the minimum wage.
Webb said a rule of thumb is that you need two-thirds of your final salary in retirement in order to live comfortably.
If you are not on track to receive that in retirement you may want to look at working for longer or working part-time.
‘You might want to consider working longer to improve your retirement income…Someone retiring at age 65 is likely to secure a better income if they keep working for an extra five years, not least because they have the chance to save more and can allow their pension pot more time to grow, but because annuity rates will improve the older people to get,’ said Webb.
If you don’t draw your state pension straight away then the level of state pension you will receive increases.
‘The £140-a-week universal state pension, if implemented by the government, will make retirement planning much easier as people will be able to work out exactly how much they need to save on top of the state pension to achieve a comfortable retirement.’
Other retirement savings
Not everyone loves pensions or the idea of locking all their money away for decades, and in real life emergencies happen and you may need access to your money.
Webb said individual savings accounts (ISAs) offer ‘an alternative way to save for your retirement alongside your pension’.
You can save £11,580 in the 2013/14 tax year into a stocks and shares ISA and any money you make you can take tax-free.
You can use your ISA to save for your retirement alongside your pensions and have access to your savings should you need it.
More about this:
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- Don't qualify for auto-enrolment? You can still opt into a pension
- How to pick a good fund for your ISA and pension
- 5 tips for managing your pension pots
- Workplace pension saving drops 15% in five years
- Why we're going to get the state pension later and later
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