Many people are mystified by their pensions. They receive an annual statement and file it in a drawer every year none the wiser about what this means in relation to their retirement goals. If you consider that few people stay in the same job all their working life, this can mean that the amount of paperwork grows but their understanding of how this relates to achieving their objectives doesn’t.
This lack of engagement and understanding can mean that it’s hard to be enthusiastic about a really important aspect of your financial planning.
Life expectancy is increasing, and this may mean you have to fund a 30+ year retirement. You’re also likely to have multiple assets which you’ll have to use to deliver this income. Identifying these assets and ensuring they are invested sensibly is essential.
Starting with the end in mind is a great place to begin. How much income do you think you’ll need in retirement? So many people I speak to can’t answer this question. Creating a spreadsheet to analyse your current spending habits can be helpful. You can then use this as a starting point to consider how this may change in retirement. Having a goal to work towards can be very motivating.
The earlier you start saving you have more potential to achieve your longer-term financial objectives. Forming a habit early in your working life is more likely to mean you stick to it and importantly the money will be invested over a greater period of time. This could mean that you don’t have to invest as much and can also consider taking more risk as you have longer until you need to use the funds.
My quick tips for making the most of opportunities with pensions are:
- Always explore the options in your workplace. There’s likely to be a pension on offer which is low cost and which your employer must also contribute to on your behalf, by law.
- Tax relief on your contributions means that the government contribute, and you may also be able to get a tax rebate if you pay higher rates of tax.
- Working with a professional adviser can help you see the bigger picture. I use a cash flow modelling system with my clients that visually shows how they might fund their retirement. It includes the state pension and all of their other assets. It helps bring to life the paperwork they file every year and they can start to make sense of what their financial future may look like and make changes if necessary.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.