Annabelle Williams, personal finance specialist at Nutmeg, has spoken to Express.co.uk about navigating these options and stepped in with essential suggestions for putting together a retirement action plan.
To begin with, she says: “The more you have saved, the greater the choices available to you. And there is no better incentive than that.”
“These pensions can provide solid backbone for your retirement. They often come with perks such as annual increases to pension payments to keep up with inflation or benefits paid to your partner in the event of your untimely death.”
A defined contribution scheme provides people with a fund into which they invest their money (at least eight percent of their salary) where they see value grow naturally over time, due to it being invested in assets.
Ms Williams added: “Defined contribution pensions tell individual members how much they have invested for retirement.
“From the age of 55 savers are free to decide whether to make regular withdrawals, to keep their savings invested, to opt for an annuity or even withdraw the entire sum – bearing in mind there are tax implications for each option.”
Turning towards the question of how much people actually need to save away to give themselves the retirement they want, Ms Williams stresses that proactive planning is required here.
She said: “You might think you’re saving enough for retirement, but it’s best to get a clear idea of exactly how much you will need to live off. Start by looking up your life expectancy – you may be surprised at how old people born in the same year as you are expected to live.
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“Log into each of your pensions – or track down the paperwork – and find out how much you have in total. Next, factor in any other money you have coming in such as rent from a property or motorhome. If you have worked and paid national insurance for 35 years (or you’re on track for this) then you should have the [full] state pension in retirement too.”
The new full state pension is worth £179.60 a week, which works out to roughly £9,340 a year, so plays an important job in supplementing private pension income.
Once people know this, she says people can move on to looking at what lifestyle they can expect to enjoy with their retirement income.
For this, an online pension calculator can be useful to tell people how much they need to support a frugal lifestyle, one with more of life’s comforts such as some holidaying or a more luxurious lifestyle with regular foreign travel and eating out.
“These calculators show how much a person needs to put into their pension each month and take into account predictions for the stock markets, as money put into a pension is invested and the overall pot should grow bigger each year”, Ms Williams said.
“Don’t despair if the numbers seem astronomical. Remember that if you are saving into a workplace pension there’s a contribution from your employer too and the government provides a top-up based on your income tax band.”
As previously mentioned, when people reach the age of 55, they will be able to withdraw cash from their defined contribution pension without incurring a tax penalty. They will need to decide if this is the right time (for most, it will be too early).
If it is the right time, people will have to decide how to draw their retirement income.
Ms Williams said: “People approaching the age of 55 need to think long and hard about whether they want to withdraw the 25 per cent tax-free cash that’s allowed under the Government’s pension rules.
“Remember that your pension savings have to last the rest of your life, so this tax-free withdrawal offer isn’t an excuse to splurge. If you have debts or a mortgage, using some of your pension to pay them off could be a sensible move.
“A financial adviser can show you calculations for exactly how much you could withdraw tax-free and how much more that money could be worth if it’s left in the pension.”
It should also be understood that what people mean when they think of retirement is changing and, increasingly, retirement doesn’t mean one needs to give up work for good.
Naturally, what one wants from retirement will be unique to the individual and a retirement free of the stresses and strains of working life may be just what someone wants.
Ms Williams said: “Unlike in previous generations, it’s now far less common for people to pick a retirement date and then stop working for good. Working gives people meaning, a structure to the day and keeps the mind occupied.
“If you stopped working altogether, how would you fill the extra 45 hours in the week? It’s more common now for people to glide into retirement by cutting back their hours or going part time, making the most of having an income and something to occupy your time while you still have your health.”