Underestimating the amount you need in retirement: How a mid-life check can help

Do you know how much you need to save into your pension for the retirement you want?

Millions of pension savers are underestimating how much they’ll need once they give up work. It’s a miscalculation that could lead to a retirement that doesn’t meet expectations. Even if retirement seems a long way off, a pension health check can make sure you are on track. It’s far easier to bridge a pension gap if you recognise the shortfall early.

Two-thirds nearing retirement not saving enough

Analysis found that two-thirds of those aged 50 to 65 are under-saving for retirement.

If you reach retirement age and find there’s a shortfall in your pension, your options are limited. You may have to carry on working for longer or settle for a lifestyle that doesn’t match your aspirations.

In contrast, finding a pension gap when you’re middle-aged gives you an opportunity to plug the gap. Increasing regular contributions or adding a lump sum can get you back on track. It means you know what income you can expect in retirement and look forward to a secure lifestyle.

Mid-life pension health check

Despite the importance of understanding what kind of retirement you can afford, it’s a task many are putting off.

An Aviva survey found 53% of people in their mid-life have never calculated when they can afford to retire and 61% have never requested a State Pension forecast. A mid-life pension check can give you confidence in your future and mean you’re able to look forward to retirement.

So, what should you be checking?

1. Your State Pension forecast

The State Pension alone isn’t enough to fund retirement for most people. However, it can provide a reliable income that you’re able to build on. In 2020/21, the full State Pension pays £9,110.40 annually.

There are two things to check when reviewing your State Pension forecast.

The first is when you’ll reach State Pension age. This is currently 66 but is rising. By the mid-2030s, it will be 68 according to the government’s current timetable.   While you are able to access your personal pension from age 55 (although this age will also rise), the State Pension Age should be taken into consideration when planning your retirement.

The second area to review is how much you’ll receive. The State Pension increases each tax year by a minimum of 2.5% under the triple lock. However, to receive the full amount, you must contribute at least 35 qualifying years National Insurance Contributions. If you have fewer than this, you’ll receive a portion of the State Pension. It’s worth reviewing whether you’re on track to meet this requirement as you may be able to buy years to fill the gaps.

You can check your State Pension forecast here.

2. The type of pension you have

Over your working life, you’re likely to accumulate a few pensions. Take some time to find the details of each and understand the kind of pensions you hold. There are broadly two types.

  1. Defined Benefit pension: This type of pension will pay you a guaranteed income from a set retirement date until you die. The pension is generally funded by your employer, although employees are usually also required to make regular contributions. You don’t have to worry about investment performance as the pension income is secure. The calculation to determine your income will be pre-defined at outset. It’s usually tied to how long you pay into the scheme and your final salary.
  2. Defined Contribution pension: This is funded via regular contributions from your income and/or your employer, either through their own pension scheme or via your own personal pension. Depending on your total income and the annual allowance at the time of the contribution, you will also receive tax relief. When you reach your selected retirement age, the value of the pension will depend on your contributions and the investment performance. You must then decide how and when to use your pension to create an income.

If you’ve ‘lost’ a pension, you can use the government’s tracking service here.

3. Pension values and forecasts

When reviewing your pensions, you will need to consider how much they are worth now and their forecasted value at your chosen retirement age.

Make sure the retirement age is correct and keep in mind that this is a forecast only. Investment performance or leaving a pension scheme will have an impact on the value when you retire. But it can be useful for giving you a general idea if you’re on the right track.

What does the pension value mean for retirement lifestyle?

The value of your pension can be useful, but it doesn’t help you answer the question of whether you’re saving enough. To do this, you need to consider a range of factors, including life expectancy, retirement age and the lifestyle you want. You may also plan to use other assets to supplement your pension income. This is something we can help you with.

It’s never too soon to start thinking about retirement. Please contact us to discuss your pension savings and how they can help you live the retirement you’re looking forward to.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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 at retirement. 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.

What do our clients have to say?

I was recommended to Simon when I moved from London to Hampshire around 10 years ago. I wanted top quality financial advice across both my highly intertwined business and personal/family lives, able to be delivered often face to face without too much travel effort. My needs started with tax management advice but quickly spread to how to fund a house purchase and renovation, and then my children’s education. As I reach my mid-50s, the questions have been more to do with pension, London property and my family investment portfolio. Simon has been beside me all that way. Why? Well, professionally, because he knows his subject, is always well prepared, can explain things quickly and clearly, and is sensible and sincere in his advice. When occasionally I have questioned him toughly, he has proved his advice can withstand that. So, I have learned to trust his recommendations, which always save me time, stress and help me to be financially well prepared. On a personal level, it is always nice to see him as he is friendly, tries really hard to help and makes all his clients, however unimportant in terms of fees, feel looked after and valued. Trust him, it’ll be worth it.

James, from St Marybourne

We have used Simon for around 10 years. We started from a point where retirement was a scary thought which we could never afford. Working with Simon we put a plan together and now we feel that financially the future is much clearer. Simon is not one for fancy high risk instant results; he has always made this clear and in the process has steered us away from several ‘get rich quick’ schemes that have tempted us.

Mike, from Whitchurch

We were looking to invest a windfall for the long term in a tax-efficient way so that it could provide additional support to our disabled child in the future. Simon arranged a plan that provides for this and also combined our various pension schemes onto a consolidated platform. This enables accurate cash flow modelling that would not be possible with a variety of scattered funds. Our regular reviews have been invaluable in reducing any financial uncertainty and concern. Simon has arranged life cover offering greater value for money and with premiums paid directly from my company, effectively reducing the cost.

John, from Godalming

I have been working with Simon for a number of years now and have come to really value his financial planning advice. He first helped me to invest the money I made from selling my business and since then he has continued to advise my husband and I on all aspects of our financial and retirement planning. Simon brings a well-informed, balanced perspective to our financial decision-making that is always reassuring.

Rachel, from Richmond-Upon-Thames

We originally contacted Simon shortly after we married, as we had a diverse portfolio which was proving difficult to manage. Simon helped us to clarify our investment aims for growth and income over our working lives and into retirement, providing the information we needed to select the appropriate risk strategy for our investments. Our portfolio is now well structured and easy to manage, together with regular updates on the value. Simon meets with us at least once a year to discuss our portfolio, is always well informed, providing us with appropriate advice and information to make any decisions.

William, from Southampton