Session 6: Planning for retirement
Pension planning is arguably the most important aspect of personal financial management.
Ensuring enough income for a comfortable and hopefully enjoyable retirement has always been important, and with growing longevity, the average time people have in retirement has risen in recent decades. Those aged 65 in the UK currently have an average expected life span of a further 19 years for men and 21 years for women (ONS, 2019a). That is just the average expectation: many people are living into their tenth decade and beyond.
It has always been important to plan for income in later life but growing longevity makes it essential. Other factors have reinforced this need to prepare early for life in retirement:
- The age at which people can start to draw their state pension has been rising – particularly for women – and will rise further in future years. With growing longevity, the cost to the government of the state pension is pushed upwards. So, increasing the age at which people can claim it is one way to contain this cost.
- Low investment returns over the past decade, with interest rates at record low levels, have made it more difficult to amass savings to augment pension income.
This session looks at how to plan for a sufficient income in later life.
You will study state pensions, occupational and personal pension schemes, as well as other means of obtaining cash for use in retirement.
You will also look at the pension reforms introduced in 2015. These have provided more options for people to use their pension funds.
There are complex tax issues surrounding pensions too and you will learn about these.
It’s never too early to think about pension planning, so let’s get going by looking first at how your spending changes when you retire. Before knowing how much income you need in retirement, you require a good estimate of how much you expect to spend.
At the end of this session you should understand:
- how the UK state pension works
- occupational and personal pension schemes
- the differences between defined benefit (‘salary-linked’) and defined contribution (‘money purchase’) pension schemes
- the flexibility now available to use the money held in your pension fund (and the risks this may expose you to)
- the key tax issues that apply to pension planning
- your options if your pension income is insufficient to meet your spending in retirement.
This Session is one of a suite comprising the course MSE’s Academy of Money and has been made possible by financial and content contributions by MoneySavingExpert.com.