6 Thinking ahead about your pension
It may seem odd to think about a pension as soon as you start your working life but the fact is that the earlier you start to plan for income in later life the better. The more you can save for your pension in your 20s and 30s the less you will need to set aside for it each month than if you start later. If you start to plan a pension from your 40s or 50s it might simply be too late to build up sufficient funds to retire when you want to or to have the standard of living in later life that you aspire to.
A minimum level of pension income is provided by the state pension – although this is, for most people, not enough for a comfortable retirement. So you need to supplement what the state will give you with your own pension – a pension that might come via a workplace scheme (an occupational pension) or a scheme that you arrange personally (a personal pension).
The basics of pension planning are reasonably straightforward.
- Estimate how much income (after tax) you need to have a comfortable retirement. This means forecasting what your spending needs will be.
- Deduct the amount of state pension you expect to receive and when you expect to receive it (bear in mind that the age at which the state pension is paid is moving upwards).
- Find out how much you need to invest each month to ensure that the fund built up over your working life provides the income needed to bridge the gap between the outcomes of the first and second steps.
This is not a precise science but you should get a fairly clear idea of your needs through this three-step analysis. Repeating this analysis as you go through your working life will keep you on track. One way to deal with any discrepancies between your forecast and the amount of income you need is to shift the age at which you start you retire. With the exception of certain specified occupations, compulsory retirement ages in the UK have been discontinued.
Activity 4 How will your spending change?
How do you think your spending will change in retirement relative to your pattern of spending in your working life? Itemise here the broad categories of your spending and then consider whether they’re likely to move up or down in retirement.
Some items of spending will fall (travel costs, if work involved a long commute) and others are likely to fall away completely (mortgage costs, since by it’s probable that by retirement you’ll have completed the repayment of your mortgage). Other costs might rise (medical costs; heating costs – due to more time being spent at home). For most people annual spending tends to be lower in retirement than during their working life.