Category

Pensions

How much pension to retire at 55?

By | Pensions

For many people, retiring in your 50s is a primary financial goal. It can open up freedom to pursue the things you enjoy – such as sports, travel and voluntary work. Yet many people also underestimate how much they need to save to retire at 55. After all, UK life expectancy is over 81 years and, in one year, over 15,000 people may live to over 100. Retiring from 55, therefore, could mean needing a pension that lasts multiple decades. In this article, our financial planning team at WMM explores how much pension you need to retire at 55 – suggesting ideas to help people achieve their goals.

 

How much pension to retire at 55?

Everyone’s income needs are different in retirement. However, studies suggest that in 2022 a couple needs at least £15,700 to cover their basic needs in retirement (or, £29,100 to have a “comfortable” retirement). A single person could live a moderate lifestyle with about £20,000 per year. Assume, therefore, that you retire at 55 and live until 85. This means multiplying these figures by 30, at a minimum, to start to get an idea of how much pension you need to save.

Suppose you need £20,000 per year in retirement. To make this last over 30 years from age 55, you’d need at least £600,000 saved in your pension(s). However, things get more complicated due to different types of pension, as well as inflation.

First of all, most retired people do not simply live on income from a pension “pot” (e.g. from their workplace). They tend to also rely heavily on the State Pension, which comes from the UK government. In 2022-23, the full new State Pension is £185.15 per week (£9,627.80 per year) and requires 35 “qualifying years” on your National Insurance record. This takes away a lot of the pressure to save everything you need for retirement yourself, into a pension pot.

However, secondly, inflation erodes the value of money over time. £20,000 in 2022, for example, will buy fewer goods/services in 2030. This “downward pressure” on the value of your pension pot(s) typically means saving more than you might think you need, to account for the rising cost of living. Fortunately, the State Pension rises each tax year in line with inflation (at minimum). Many “final salary” pensions and annuities also do this. However, you will likely still need to take account of inflation in your pension investment strategy – both before and during retirement.

 

Ideas to retire at 55

To have a chance of retiring at 55, you first need to understand the pension landscape. Pension “pots” can be accessed from this age (rising to 57 in the future), yet some final salary schemes may not be available until later. Your State Pension, moreover, will not provide an income until you reach State Pension age – i.e. your late 60s. Earlier in your retirement from 55, therefore, it will be wise to consider other tax-efficient investment “vehicles” to provide an income until you can start accessing your pension(s). Here, a stocks & shares ISA can be a good option, since the capital can be accessed at any time.

Also, the less you need to spend in retirement, the less you need to save. For instance, having no mortgage from age 55 would take away a large monthly expense (although this goal may not be a priority or achievable for everyone). 

Finally, consider seeking financial advice if you want to retire from age 55. A financial planner can help you think through issues or opportunities you may not have considered. Bear in mind that the earlier you want to retire, the harder it is to project your cash flow, so you may benefit from the software and expertise our experts can offer.

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

What is happening with the pension triple lock?

By | Pensions

The State Pension is changing, and many people in receipt of it are asking what may lie ahead for their retirement income. The “triple lock” system, in particular, has raised fresh questions as the Government confirmed its suspension in the 2022-23 tax year (started on the 6th April 2022). Below, our financial planning team at WMM explains how the system works, how it has changed and what could lie ahead for the State Pension.

 

How the triple lock works

Income from the State Pension, in recent years, rises every tax year (April-April) in line with the highest of three measures:

  • 2.5% (a flat rise).
  • Inflation (measured in the previous September).
  • Growth in average UK earnings (measured from May to July).

This “triple lock” system is designed to help ensure that the State Pension rises each year at least in line with the cost of living.

 

Recent changes

When COVID-19 brought an unprecedented shutdown to the UK economy from March 2020, the government introduced a range of measures to help support businesses and the wider population (e.g. furlough). These required huge amounts of borrowing – e.g. £297.7bn in the 12 months prior to March 2021 – which the government now faces increasing pressure to repay.

Moreover, one of the knock-on effects of furlough was that this distorted average earnings growth (point 2 3 above) as lockdown measures lifted, employers brought more workers back into the office and reinstated their normal wages. This pushed the growth figure to over 7.3%.

As such, this would have required the State Pension to rise by at least 7.3% in April 2022 – putting huge pressure on the public finances. To counter this, the government announced that the triple lock system would be suspended in 2022-23.

Instead, the State Pension has risen by 3.1%

 

Possible roads ahead

This 3.1% rise feels like a blow to many retired people. Not only is it less than half of what they would have received under the triple lock system, but it mirrors the inflation rate in September 2021. In 2022, however, inflation has risen considerably higher. 

In the 12 months to February 2022, the Consumer Prices Index (CPI) has gone up by 5.5%. The Bank of England (BoE), moreover, anticipates that this could go as high as 8% later in the year. This, naturally, raises a lot of questions. Will inflation be brought under control before the next tax year? If not, could the triple lock be suspended again?

A precedent has been set by the government, so these are legitimate questions. The current administration has clearly stated that they do not think the triple lock system should be around indefinitely. Rather, the commitment has been for the existing parliamentary term (i.e. up until 2024). Other major UK parties support keeping it, so the issue is likely to be debated fiercely in the coming general election.

It is a good idea to regularly review your income sources for your retirement. Your State Pension will likely be important, of course, but it will also help to have other pension schemes (e.g. a workplace and/or private pension) to help support your lifestyle. There are also other assets you can use, too, such as dividends and income from your ISA(s), rental income etc. 

With a diversified retirement portfolio, you can help mitigate the risks associated with specific assets or income streams (e.g. your State Pension).

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

Annuity or drawdown for retirement?

By | Pensions

What’s the best way to generate a retirement income? Broadly speaking, there are two primary options. You can buy an annuity – a financial product which provides a guaranteed income for life. The other option is income drawdown, which involves keeping your pension invested whilst withdrawing gradually from it to fund your lifestyle.

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Your pensions: the cost of not having a financial planner

By | Pensions

If you already have a financial planner you will be well informed of your income options in retirement. Your retirement plan will most likely comprise a mix of different sources to deliver a tax efficient ‘income stream’. Even without a financial planner, some people may still feel they have a solid plan in place. However, there is worryingly high number of people who aren’t really sure what they have or how they’ll provide for themselves in retirement, perhaps believing the State will support them.

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Your pension after death: what happens?

By | Pensions

What happens to your pension when you die? The rules about this were changed in 2015 under the Pension Freedoms. The good news is, your pensions are not usually considered to be part of your estate when you die – which means they are not subject to inheritance tax (IHT). Your surviving spouse or civil partner may also be able to access them, in certain circumstances. However, the rules depend on a range of factors including the type of pension in question and your age upon death. In this post, our team at WMM outlines how the rules work for different types of pension when someone dies.

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Get the most from auto-enrolment

By | Pensions

Workplace pensions have changed in recent years. Traditionally, the responsibility was on the employee to join their workplace pension scheme. Today in 2021, however, most employees are automatically placed onto their employer’s scheme under the UK’s “auto-enrolment” rules – although you can choose to opt out. The amount that you pay in depends on your salary, since contributions are a percentage of your pay. The higher your pay, the more you automatically pay in. However, given that the rules have changed a lot over the years, many people are still not getting the most from auto-enrolment. Below, we explain some ideas showing how to do this.

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How to avoid pension poverty

By | Pensions

Will you have enough money to sustain you in retirement? According to the UK Poverty 2019/20 report, over 2m people live in pension poverty. This refers to when “A person’s resources (mainly their material resources) are not sufficient to meet their minimum needs (including social participation)” in retirement. The biggest subsets seem to be in London (23%) and Wales (20%), but it also affects people across the whole UK.

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Side-step this key pension trap

By | Pensions

Pension rules in the UK are notoriously complex. Not only are there multiple types of pensions to deal with, but drawing from them needs to be planned carefully. For instance, did you know that the State Pension is accessible from your State Pension age – 66 in 2021 – but you can only access your defined contribution pension(s) from age 55 (under the 2015 Pension Freedoms)?

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How good are final salary pensions?

By | Pensions

There are many types of UK pension – with final salary pensions often referred to as “gold plated” ones. Also sometimes called defined benefit pensions, final salary pensions pay you a lifetime, guaranteed income in retirement – similar to a state pension.

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