During your working life, retirement can seem far off. But it’s a milestone that can unexpectedly creep up. For Generation X, those now in their forties and early fifties, now is a crucial time to start engaging with their pensions and setting out what they want to achieve once they give up working.
Those that are part of Generation X are now approaching retirement age. However, some suggest that many will be ill-prepared. Many of the Baby Boomers that came before them benefitted from Final Salary pension schemes that offered more financial security throughout retirement. Their children in the Millennial Generation are starting to save into a pension at an earlier age, thanks to auto-enrolment. But where does this leave Generation X?
Those now in their forties and early fifties that haven’t prioritised saving into a pension during their working life could be facing financial challenges. While saving for retirement is important, it’s easy to see how it can end up on the back burner. Even now, as the milestone approaches, you may be focused on paying off mortgage debt, supporting children or elderly parents, or any number of other areas.
Despite other, sometimes conflicting, priorities, it’s time for Generation X to really start thinking about their retirement. If it’s a task you’ve been putting off, there are some key questions to ask. Acting now gives you an opportunity to make up shortfalls, adjust expectations and set out a retirement plan that’s realistic.
1. How will the State Pension support you?
The State Pension can provide you with a base income to build on. It’s a useful foundation as it’s a set level of income that you can rely on throughout retirement. However, alone, it’s not enough to live a comfortable retirement lifestyle; it may not even cover your essential outgoings.
Assuming you have a full National Insurance (NI) record, the State Pension currently pays £164.35 per week; £8,546 annually. Despite this being far below the income many workers are hoping to receive in retirement, a previous Financial Conduct Authority report found it will be the main source of income for 44% of retirees. Almost a third (31%) of UK adults have no Private Pension provisions.
Looking at how the State Pension would support you now can help you assess what other steps need to be taken.
To be eligible for the full State Pension, you must have 35 qualifying years on your NI records. If you don’t, you will receive a portion of the State Pension. In some cases, you may be able to purchase additional years if necessary. You can check how much State Pension you could get here.
2. What have you already saved into a pension? And what’s the projected value at retirement?
If your pension contributions are deducted from your pay cheque, you may barely give them a glance each month. But to get your retirement plan on track, you need to look at how you’ve progressed.
The first step is to find out what the current value of your pension is. You should receive an annual statement from your pension provider with this information on or be able to log in online to view the details. The provider will also offer a projected income at retirement age. This figure is based on investment assumptions and isn’t a guarantee. However, it can give you a useful guide for planning your retirement finances.
3. How much income do you need in retirement? Will there be a shortfall?
The answer to the second question will have little meaning if you don’t put it into the context of your actual spending.
The first step here is to think about how long your pension will need to support you for. Life expectancy is often something we underestimate. In retirement planning, it could mean spending too much too soon. With life expectancy rising and most people enjoying lives well into their eighties, it’s not uncommon for a pension to need to support you for 30 years or more.
There are a lot of general rules for how much income you need in retirement; two-thirds of your annual salary to maintain your current lifestyle is a common one. However, it’s an individual figure. It will depend on what your goals and priorities will be throughout retirement. This is an opportunity to think about the lifestyle you want and how much it will cost to achieve it. From here, you can assess if there’s a gap between your retirement expectations and what’s currently achievable.
4. Do you have any other assets that could help fund retirement?
When you’re saving for retirement, it’s often a pension that’s at the forefront. However, there are many other assets that can support your retirement dreams. If you’ve found that your pension will leave a shortfall in the income you need, these other assets can help plug the gap. Assets may include savings held in an ISA (Individual Savings Account), property or an investment portfolio.
It can be difficult to decide what assets you should access to create an income and how to sustainably withdraw money from them. This is where a financial plan is essential. It can help bring together all your assets to build a retirement plan that matches your aspirations and the resources you’ve built up in the most tax-efficient way.
5. What steps could you take now to improve your retirement income?
Following a closer look at their finances, many people find that they’re in a better position than expected. However, if you find that there is a gap, you should start to take a look at the steps you can take to fill it. You could, for example, increase your contributions to your pension, change the date you plan to retire, opt for a phased semi-retirement, or adjust your retirement plans.
Taking action to understand your retirement income now gives you an opportunity to correct any shortfalls you may find. It means you can head into retirement with realistic expectations and confidence in the decisions you make.
If you’re ready to start making retirement plans or would like help assessing your pension, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
