📺 How much money would you actually need for retirement?

How do we overcome the mental block when it comes to investing in our future?

It can be difficult to envision ourselves 20, 30, 40 years from now. This means that all too often, we don’t take the steps we need to take to benefit our future selves.

While we’re living longer, the State Pension doesn’t offer us enough of a buffer. We’re therefore faced with a sometimes daunting personal responsibility to save and invest while trying to eventually achieve our dream retirement.

Here’s a summary of our interactive recording with Becky O’Connor (Director (VP) Public Affairs at PensionBee), Emma Maslin (Money Coach and Founder of The Money Whisperer) and Emilie Bellet (Founder of Vestpod).

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How do we overcome the mental block of investing for our future selves?

Discussing pensions can be stressful, and it’s not a topic most of us are particularly fond of. However, it’s crucial we address it in order to live the life we want as we get older. 

One way to overcome this mental block is to adjust your attitude towards retirement. Instead of thinking of retirement as a destination, think of it as a journey. Allow yourself time to figure everything out, and remember that you can always change direction if necessary. Focus on what you’re gaining, rather than the things you’re losing, and build resilience.

• Visualise your future self: Try to imagine what your life will be like in retirement. What kind of activities will you be doing? Where will you be living? What kind of lifestyle will you have? By visualising your future self, you can create a more concrete image of what you’re working towards. You can use an AI tool to create a photo of your future self, it can really make that connection feel more real.

• Write a letter to your future self: What are some of the things you’d want to hear in 20 or 30 years’ time? Do you have an idea what future you might want to do in their free time?

• Set specific goals: Setting specific goals for your retirement can help you stay motivated and focused. For example, you might set a goal to save a certain amount of money each month, or to pay off your mortgage before you retire.

• Create a plan: Once you’ve set your goals, create a plan for how you’re going to achieve them. This might involve creating a budget, investing in a retirement account, or seeking the advice of a financial planner.

• Stay informed: Keep up-to-date with the latest news and trends in retirement planning. Attend seminars, read books, and talk to experts in the field. The more you know, the better equipped you’ll be to make informed decisions about your retirement savings.

• Find a support system: Surround yourself with people who are also working towards their retirement goals. Join a retirement savings group, or find a friend who is also interested in saving for retirement. Having a support system can help you stay motivated and accountable.

• Celebrate small victories: Saving for retirement is a long-term process, and it’s important to celebrate small victories along the way. For example, if you reach a savings milestone, treat yourself to a small reward. This can help you stay motivated and focused on your goals.

• Stay positive: Finally, it’s important to stay positive and optimistic about your retirement. Remember that saving for retirement is a long-term process, and it’s never too late to start. By taking small steps and staying focused on your goals, you can create a more secure future for yourself.

The reality of the State Pension

In the UK, the State Pension age is currently 66 years old for both men and women. However, the State Pension age is regularly reviewed, and it is set to increase to 67 by 2028. You can check when you’ll receive your State Pension using the GOV.UK checker (Check your State Pension forecast).

However, the actual retirement age can vary depending on a variety of factors, such as personal preference, financial situation, and health status.

We are living longer, and it’s important to consider whether the State Pension is enough to live off. While the state Pension can provide a basic level of income in retirement, it may not be enough to cover all of your expenses. Therefore, it’s important to plan ahead and save for retirement through other means, such as a workplace or personal pension.

The amount of State Pension you receive in the UK depends on your National Insurance record. You can check your State Pension forecast to find out how much you could get and when. The full new State Pension is £203.85 per week, and this is set to increase by 8.5% to £221.17 a week in April 2024 due to the triple lock guarantee.

Whether this amount is enough to live off depends on various factors such as your lifestyle, living expenses, and other sources of income.

How much do you actually need?

According to the PLSA: “Roughly speaking, a single person will need about £13k a year to achieve the minimum living standard, £23k a year for a moderate living standard and £37k a year for comfortable living. For couples, it’s 20k-34k-55k.”

To calculate how much you need in retirement, you can use a pension calculator. The PensionBee Pension Calculator or MoneyHelper Pension Calculator are free tools that can help you estimate your retirement income from workplace schemes, private pension contributions, and the State Pension. The calculators will provide you with a forecast of the likely pension income you’ll receive when you retire, including income from defined benefit and defined contribution pensions, and your State Pension. It will also give you a target retirement income to aim for, taking into account your salary. You can alter your retirement age to see how that affects your income, and you can also see how increased contributions or taking a smaller tax-free lump sum affect your yearly pension.

If you want to retire comfortably, you should aim to save enough money to cover your living expenses and any additional costs you may incur during retirement. A good rule of thumb is to aim for a retirement income that is at least two-thirds of your pre-retirement income. This will help ensure that you can maintain your standard of living and enjoy your retirement years without financial stress.

To achieve this goal, you may need to start saving early and regularly. You can consider contributing to a workplace pension scheme or setting up a private pension plan. You may also want to consider other investment options, such as stocks, bonds, or mutual funds, to help grow your retirement savings.

Shifting narratives around ageing

New analysis by WHO shows that negative or ageist attitudes towards older people are widespread. They also negatively affect older people’s physical and mental health. Fully 60% of respondents in the "World Values Survey" analysed by WHO reported that older people are not respected.

The topic of ageing and saving for pensions is often seen as a taboo. However, there are ways to shift the narrative and encourage more people to save for their retirement.

One way to change the narrative is to focus on the positive aspects of ageing and retirement. Instead of framing retirement as a time of decline and loss, we can emphasise the opportunities and benefits that come with it. For example, retirement can be a time to pursue hobbies, travel, spend time with family and friends, and engage in other activities that bring joy and fulfilment.

Another way to shift the narrative is to make retirement planning more accessible and engaging. This can involve providing more information and resources about retirement planning, as well as creating more opportunities for people to learn about and discuss the topic. For example, employers can offer retirement planning workshops and seminars, and financial institutions can provide online tools and resources to help people plan for their retirement.

Finally, we can shift the narrative by challenging ageist attitudes and stereotypes. Ageism is a form of discrimination that can affect people of all ages, and it can have a negative impact on retirement planning and other aspects of life. By challenging ageist attitudes and promoting a more positive view of ageing, we can help create a more inclusive and supportive society for people of all ages.

The Carer’s Pension Gap (PensionBee)

Attitudes towards work and retirement accelerated by the Covid-19 pandemic have changed. Two in five 55-64 year olds plan to move into semi-retirement before reaching State Pension age. 

The Carer’s Pension Gap is the difference in retirement savings between people who have to take time out of work to provide unpaid care for someone and people who do not. According to the report by PensionBee, the Carer’s Pension Gap is roughly £30,000 for someone who needs to provide care at five key moments in their life. This means that they will have a lower income and living standard in retirement than someone who did not have to care for anyone.

Continuing to work through retirement can be a way to reduce the carer’s pension gap and enjoy the benefits of working, such as income, social connections, and purpose. However, it also requires planning and flexibility, as well as overcoming some challenges and drawbacks. 

Here are some perks you could enjoy:

• Providing a source of income and financial security

• Keeping your skills and knowledge up to date

• Maintaining social connections and networks

• Enhancing your sense of purpose and self-esteem

• Improving your physical and mental health

However, there are also some challenges and drawbacks, such as dealing with burnout and balancing work and your precious free retirement time.

That’s why planning for semi-retirement is important. Some of the steps you can take include assessing your financial situation and goals, negotiating flexible work arrangements with your employer or clients and building a diverse portfolio of income sources.

Practical tips on getting started

• Start early: The earlier you start saving for retirement, the more time your money has to grow. Even if you can only afford to save a small amount each month, it’s better than nothing.

• Take advantage of employer contributions: If your employer offers a retirement plan with matching contributions, take advantage of it. This is essentially free money that can help you reach your retirement goals faster.

• If you’re self employed or not working, you can still start a personal pension. You can contribute to a pension even if you don't pay tax, or have no earnings at all. The annual pension contribution limit for non-earners is £3,600 gross - a payment of £2,880 and £720 in tax relief that you get back from the government.

• Sign up for Child Benefit: By claiming Child Benefit, you can get an allowance paid to you for each child, which you'll usually receive every 4 weeks. Also, parents who claim Child Benefit receive a national insurance credit which helps them build up their State Pension. To receive the full state pension in retirement, you need to have had at least 35 ‘qualifying years’ of national insurance (NI) contributions during your working life. Currently, parents who claim Child Benefit receive a national insurance credit which helps them build up their State Pension. It is also important to note that Child Benefit itself isn't being taxed or reduced - it will continue to be paid in full to the claimant.

• Automate your savings: Set up automatic contributions to your retirement account each month. This will help you stay on track and ensure that you’re saving consistently.

• Educate yourself: Take the time to learn about different retirement accounts, investment options, and tax implications. The more you know, the better equipped you’ll be to make informed decisions about your retirement savings.

• Make a budget: Take a look at your income and expenses and figure out how much you can realistically save each month. Even if it's a small amount, it's better than nothing.

• Reduce expenses: Look for ways to cut back on expenses so you can save more money. This could mean downsizing your home, driving an older car, or eating out less often.

• Get professional advice: Consider speaking with a financial advisor who can help you create a retirement plan that's tailored to your specific needs and goals.

• Maximise your contributions: If you're over 50, you may be eligible to make catch-up contributions to your pension plan. This can help you make up for lost time and boost your retirement savings.

• Invest wisely: Make sure your pension investments are diversified and aligned with your risk tolerance and retirement goals We’ve all seen the stock market take a knock, which affected pensions and performance. Remember that if the performance of your pension suffers, you will still see investment growth because the performance will even out over time. Sometimes, if the market takes a turn, it’s wiser to wait it out before making a withdrawal to make the most of your money. 

• Stay informed: Keep up-to-date with changes to pension laws and regulations that may affect your retirement savings.

• Make it tax efficient: Pensions and ISAs are tax-efficient ways to save for your future goals. With both, you won’t pay Income Tax or Capital Gains Tax on any growth that you earn while your money is invested. The key difference between the two is how the money going in and money coming out is taxed, as well as how and when you can take that money out. Pensions tend to be the most tax-efficient savings option, while ISAs are simple, flexible and can be accessed at any time.

• Consider your longevity: Women tend to live longer than men, so it's important to plan for a longer retirement. Make sure you're saving enough to support yourself throughout your retirement years.

• Don't withdraw early: Avoid withdrawing money from your pension plan before you retire, as this can result in penalties and taxes.

• Review your plan regularly: Regularly review your pension plan to ensure it's still aligned with your retirement goals and adjust your contributions and investments as necessary.

• You don’t have to rely solely on your pension: Other products that can be used to supplement your pension savings. One such product is the Stocks & Shares ISA. This is a tax-efficient investment account that allows you to invest in a range of assets, including stocks, shares, and funds. The returns on your investments are free from income tax and capital gains tax. Another option is the Lifetime ISA. This is a savings account designed to help you save for your first home or retirement. You can save up to £4,000 per year in a Lifetime ISA, and the government will add a 25% bonus to your savings. The Lifetime ISA also offers tax-free growth on your savings. Both Stocks & Shares ISAs and Lifetime ISAs offer greater flexibility and diversification than traditional pension plans. They also allow you to align your investments with your financial goals and when you actually need the money.

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Even if you can only save a small amount each month, it will add up over time and help you achieve your retirement goals.

Answers from Becky O’Connor, Director (VP) External Affairs at PensionBee

How do you project those figures forward e.g. 15-20 years to allow for inflation? Finding it hard to come up with a realistic figure to aim for?

This is an excellent question. PensionBee has a calculator for that! It shows the impact of inflation on your future spending power. This is unbelievably useful for the reason you have outlined. Try our PensionBee inflation calculator.

Practically, if you make contributions based on what you would need now, if you retired tomorrow, because of investment growth hopefully beating inflation over time, you should be on track for an amount that has by itself risen in real terms to what you need when you come to retire. 

This strategy would only not work if inflation exceeded investment returns on average until you reach retirement age. Then you would find that the pot you had worked out you would need wouldn’t be enough for the same living standard in retirement.

But pensions are designed to be invested in such a way that returns do beat inflation over the long term. 

Please have a play around with the inflation impact calculator though, it’s very useful! 

I'm supposed to select one of 3 profiles for my pension (annuity/drawdown/cash) - but given what Becky just said about how much annuity rates can fluctuate, how am I supposed to select an investment profile in advance?

Although the annuity rates available change over time, when you buy one, you commit to the rate and terms offered at that time. So if you bought a level annuity offering you £7,000 a year for your £100,000 pot tomorrow, that is what you would get for the duration. But if annuity rates go down in five years time, then the person buying one in five years time might be offered £4,000 for their £100,000 pot for the duration of their retirement.

When you choose an investment profile based on how you plan to take an income in retirement, this will alter the amount of risk within the plan accordingly. So if you say you are going to take an annuity some time soon, your pension plan investments will be de-risked to reduce the chance that your pot value would go down dramatically ahead of your annuity purchase, which would obviously reduce the amount of income you could take. 

However if you are going to use drawdown, this means your pot remains invested with the hope it will continue to grow, so the investment plan for this option would involve a higher proportion of investment in stock markets. While company shares have the potential to grow the value of your pot more, they could also decline in value. That’s why this isn’t considered a good strategy for those who are about to convert their pension pot into income or put it in cash savings - just in case it falls in value shortly before you want to access a large chunk - or all - of it. 

I have a PensionBee pension from old, consolidated work pensions. I have recently changed jobs after 5 years and I can’t decide whether to consolidate my latest work pension which is c. £33k into PensionBee or to keep that and keep my options open with alternative pension pots – do I need financial advice on this?

It really depends on the type of pension this is and how much you feel you benefit from keeping them all in one place. You don’t have to consolidate. That being said, when you come to take an income, it can be easier to manage withdrawals from one pot rather than several. 

If you are over 50 you can get some free guidance on your options from Pension Wise, the government service https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise.

Depending on how complicated and varied your pension arrangements are, you may then find that you don’t need to pay for full on financial advice, which is usually charged as a percentage of your assets. It’s worth noting though, that if your pension is a defined benefit or hybrid scheme and is worth more than £30,000, you are actually required by law to get advice on transferring it before the transfer can be allowed.

Any thoughts on how a young person working abroad in Europe might save/prepare for retirement in UK? 

You can still pay into a personal pension in the UK if you live abroad, although you might not get the same tax benefits, if you are not paying tax in the UK.

You could also contribute to the State Pension scheme in the country you work in and then could be entitled to whatever benefit you built up there. You could also claim your UK State Pension, so long as you pay National Insurance contributions for at least 10 years.

If you build up a workplace pension with your foreign employer, it is often possible to transfer an overseas pension to the UK, but the rules vary by the origin country and type of pension being transferred. In some cases, it may be better to draw down money from the overseas pension into a local bank account, and transfer or withdraw that money in the UK.

How can I balance saving for retirement with other financial priorities, such as paying off debts or saving for my children's education?

You’ve hit the nail on the head there - it is about balance. 

Paying off debt is really important, but then so is saving for the future. 

If you can manage paying off debt and paying into your pension through careful budgeting, then I would suggest you should aim for this first.

If you can’t manage both through budgeting, then clearing the debt as soon as possible and resuming pension contributions as soon as you can could be an option. 

If you are someone who likes making lists and prioritising, the temptation with pensions is always to push them back down to the bottom of the list as they don’t feel urgent.

But if you were to divide your priorities into short, medium and long -term, then attempt to work towards the top priorities in each column simultaneously, this can ensure that you don’t sacrifice the future for more pressing needs, now.