Money experts frequently tell us that we should start saving for old age as early as possible. But if you didn’t manage to set up a pension in your twenties or thirties, the good news is that it’s never too late to start putting cash aside to help fund your retirement.
So if you’ve passed 50 without much in the way of pension savings, what is the best course of action to ensure you are financially comfortable when you eventually stop working?
Step 1: Put yourself in the picture
Start by establishing where you are now and where you want to get to. This means assessing what, if any, pension savings you have as well as what level of state pension you are likely to be entitled to – and when you will start to receive it. In terms of your goals, you need to think about when you plan to retire and what level of income you are going to need after you give up work.
Tracing old pensions
It is fairly common for people to have old, forgotten pensions, typically as the result of changing employers. The government has a service that can help you trace old workplace or personal pensions – visit the site here or call the Pension Tracing Service on 0345 6002 537. This should help you get in touch with the administrator of any schemes you were member of, which will allow you to find out what your fund is worth and when it should become available to you.
State pension forecasts
At present, the state pension for people retiring in 2017 is worth about £8,300 a year – not necessarily a life-changing sum, but valuable nonetheless. To check how much you are on course to receive, visit this government web page. This will tell you how much pension you should get a week based on your National Insurance contribution record. The figure is quoted in today’s prices, but state pension payments are increased each year at least by the rate of inflation.
The same forecast will tell you when you should start receiving your pension based on current legislation: the pension age for men and women will be 66 from 2020, rising to 67 by 2028.
Step 2: Set your retirement goals
The next step is to work out how much money you will need in retirement based on your planned retirement date. According to the government’s Money Advice Service (MAS), most people’s target pension income is considerably lower than their salaries – this is because they are likely to have paid off their mortgages, for example, and no longer face work-related costs such as commuting expenses or pension contributions.
The MAS says that people earning £30,000 a year typically aim for pension income of £20,000 a year, while someone on £50,000 a year might target £25,000. One of the best ways of getting an overview of what you need to do to reach your goals is by using the MAS’s pension calculator. Based on your age, expected retirement date and current level of salary and pension savings, the calculator shows how much you need to save every month in order to generate a pension fund big enough to provide for the retirement you need.
Step 3: Consider your options
If you’ve reached the age of 50 without saving anything into a pension, the results of the calculator may come as a shock. Someone aged 50 who puts as much as £6,000 a year into a pension for 18 years will still only be able to generate an extra £7,000 or so of annual income in retirement, according to MAS figures.
Clearly, though, the more you can afford to save, the better – and don’t forget that pension contributions benefit from tax relief, so for every £80 you save as a basic-rate taxpayer, the government adds £20 (or £40 for higher-rate taxpayers). Consider also whether you could use any windfalls such as an inheritance to bump up the value of your pension.
Work for longer?
If you were able to push your retirement date back, you would not only have longer to save into a pension but you’d also have fewer years’ retirement to fund. Increasingly, older people are choosing to reduce their working hours rather than retiring outright when they reach 65. Now is the time to think about whether this would be a possibility that could help you boost your pension income in later life: is your employer open to this kind of suggestion – alternatively, could you work freelance or set up your own business?
Using the value of your property
Many people who haven’t saved into pensions view the increase in the value of their home over recent decades as one way of paying for retirement. If you have owned a property for a long time and have paid off the mortgage, you’re likely to be sitting on a significant sum. But converting equity into cash is not straightforward. One option is to downsize and move to a cheaper home when you retire, using the price difference to supplement any state or private pension income.
Moving home can, however, be expensive and stressful, and may not generate as much cash as you would like. Equity release is another option: this involves borrowing money against your home’s value with the capital and interest repaid only when you die or move into care. On the plus side, you avoid having to move: but this course of action can wipe out any inheritance you hoped to leave.
- The government’s Pension Tracing Service can be found here here or call on 0345 6002 537
- If you’re thinking of working past the State Pension age the government information can be found here
- You can calculate your pension via the Money Advice Service or Just, a retirement income specialist, has one here
- Other income sources to consider in retirement can be found on Just’s site, as well as advice on downsizing
- Just has a full guide here on the types of retirement income out there, the impact of each on your financial future and the things you should be considering
Just is the sponsor of this website but The Tonic is editorially independent.