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Retirement planning tips: No plan, no cigar!

Pensions and retirement planning should be taken seriously, even at a young age. Sadly, this is often not the case. I meet people all the time with money in their pension pots and they don’t see it as real money but as wooden dollars. They don’t seem to care how the money in their pension is invested. It’s very strange.

Workplace pensions

Chances are, if you’ve just started working, your Employer will want to enroll you into their pension scheme. Typically, as long as you agree to contribute something yourself, they will offer to match whatever you decide to pay although there is generally a limit to their generosity.

Should I join a workplace pension?

If you fancy an easy pay rise, then the answer is yes. If you decide to opt out, you’ll be missing out on your employer’s contributions and tax-relief. Worse still, you’ll lose vital fund-building momentum if you aren’t contributing to a pension scheme at all. In addition to your pay rise, you will also receive a contribution from the tax-man. What’s not to like?

Related reading: How good is your workplace pension?

It’ll cost ya!

One of the reasons so many people don’t have enough money to live on in retirement is that they simply haven’t paid enough into their pension. Let’s be clear: building a retirement fund is no joke and a bit like taking out a second mortgage. There is a very rough rule of thumb for how much to contribute to your pension for a comfortable retirement.

Take the age you start your pension and halve it. This is the percentage amount of your gross salary you that should be contributing as a minimum.

How much exactly?

Let’s imagine Pete is earning £60,000 per annum and is aged 33. He and his employer should be paying a total of half his age, o 16.5% of his salary into his pension scheme. If he’s earning £60,000 per year, that would mean a contribution between him and his employer of £9,900 per annum or £825 per month.

The following year, Pete would be a year older. Let’s imagine he’s lucky and has had a pay rise and is now on £70,000. He should adjust his contributions accordingly. He should now be paying a total of £70,000 x 17% = £11,900 or £991 per month. If he made these small adjustments consistently, he would be on the right track.

Related reading: How much should I pay into a pension?

But pensions are for old people, right?

Yes, pensions are for old people. But planning for retirement isn’t. I cannot stress enough how important it is to start early. Building a pension fund is like trying to get a plane airborne. Substitute the length of time to retirement for the length of the runway. Those who start young would have a long runway and have time to build speed and momentum.

Those who left it later would have a much shorter runway and would have to invest a lot of fuel (money) to get off the ground. Those who left it too late would have no hope of getting their plane off the ground and may as well not bother.

The pensions pecking-order

There are many types of pensions out there from generic auto-enrolment schemes, personal pensions to blue chip gold plated defined benefit and final-salary pension schemes. Although anything is better than nothing, the scheme you are in may or may not be the best one for you. Our advice would be to seek advice; especially when there is a change in your financial circumstances.

A good trigger point for financial advice would be changing employer or going self-employed. Take it seriously and consider your pension planning as important. These are long term investments and small changes early on could make a big difference later. Wooden dollars? No. This is real money. Your money.

Need pension advice?

If you are planning for retirement, at Sterling & Law, we offer a dedicated pension advice service. We offer a free consultation to all new customers, so if you would like to request a callback, call now on 020 3740 5856.

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