Retirement planning through life stages

People often make the mistake of thinking retirement planning is something they can put off until they are older. When done most effectively, financial planning is a steady consideration and presence from your early 20s to your twilight years, evolving with you throughout your adult life

20s and 30s the start of your financial journey

At the early stages of life in your 20s, having completed education and launched your career, planning for retirement can be the last thing on your mind. But thanks to the effects of compound growth over the long term, there is no better time to start saving into your pension. Neglecting to do so could hurt down the line.

The incentives to save into a pension are significant. Firstly, your employer is legally obliged to pay at least 3% of your salary into your pension, so long as you are contributing at least 5% yourself. Opting out is akin to declining a pay rise. Secondly, tax relief on pension contributions is very favourable, pegged at your income tax band. This is more free money, this time from the government, which you are effectively turning away if you opt not to contribute to a pension.

But the biggest incentive remains the potential for long term compound growth. Contributing the minimum amount of 5% of your salary, along with your employer’s 3% supplement, can amount to substantial sums by the time you reach retirement age, though it is still unlikely to be enough to fund a comfortable retirement, so contributing more if you can would be highly worthwhile. In a study by Aviva last year, two-thirds of over-55s wished they contributed more into their pension at an earlier stage.

Learning to budget

Of course, your 20s and 30s shouldn’t be about throwing all of your disposable income into your pension. It’s also important to have fun experiences and enjoy your life, while also focusing on other financial objectives like buying your first home. The government will help you with this goal too by, for example, adding a 25% bonus to money you save into a Lifetime ISA, up to the annual contribution limit of £4,000. Having these different goals provides an early lesson in the importance of budgeting, which if you master you will reap great rewards throughout your life.

“Learning how to budget gives you one of the most important life skills you can have,” says Freya​ Latham, Independent Financial Adviser at Ascot Lloyd. “Split your savings into money for today and money for tomorrow across different pots. I always have about six or seven little pots on the go. These days, especially with banking and savings apps, you can do that quite easily.

“It's just about getting into good habits. Every time you get a pay rise, pay yourself half and the other half put it away because you didn't have it before anyway. Young people can typically tell me to the penny what their net income is each month but ask them what it'll be when they retire and they have no idea. Compound growth is a beautiful thing, so start as young as you can and put in as much as you can. Otherwise, you get to your 50s and find you’re running to stand still.”

Family financial sacrifices

Last month was International Women's Day, and it would be remiss not to note that women are still far more likely than men to take career breaks when having children or move to part-time work while raising a family, which can have a major impact on their retirement savings. Analysis by AJ Bell showed that a 30-year-old with a £30,000 salary who exited a workplace pension for just three years would have approximately £25,000 less in their pension pot when they retired at 68.

When women who receive pension contributions via salary sacrifice are on maternity leave, employers must maintain those contributions through the period of paid absence. Despite the financial struggles which can come from raising a family, women should avoid opting out of their pension contributions for any period of time. Further, if your income is reduced during maternity leave, upping your salary sacrifice (if you can afford to) can keep your retirement plans on track.

“I would also add that if you have no earnings at all while raising a family, you can still receive pension tax relief on contributions of up to £2,880 per year, which tops it up to £3,600,” says Freya Latham. “Men and women now have the same retirement age, but the reality is women remain disadvantaged in their retirement savings if they have exited work for any period of time to start a family. While it may be challenging, try not to take your eye off pension goals during this time.”

Saving for retirement in your 40s and 50s

As you reach midlife your priorities will no doubt change somewhat, quite possibly with children growing up and needing financial support as they go through education. Meanwhile, however, it’s likely that you will be reaching the peak of your earnings at work, which hopefully means you are able to continue to save a considerable portion of your income into your pension while also overpaying on your mortgage and ridding of other debts you may have accumulated. An extra string to your bow, if you haven’t done so already, can also come from good investment advice.

If you’ve planned well, you will already have one eye on retirement during this period of your life, and engaging with a financial adviser will help you build out your retirement goals while better understanding exactly how much you will need to have saved to achieve the lifestyle you want.

“A financial adviser is able to build that picture for you,” says Latham. “Cash flow forecasting is such a good thing because it's so visual. It’s about having that professional outlook, rather than just saying ‘it'll be alright’. The state pension can often be a bit of a shock when people realise just how limiting it is, and there's a question as to whether there is even going to be a state pension in years to come. Cash flow forecasting at this stage can be a really crucial exercise.”

60s and 70s - Your retirement decisions

Hopefully by now, if you've planned well throughout your life, you're safely in retirement. But the rising cost of living over the last year shows that, even with the best planning, there will be times when you might need to revisit your retirement plan. A good financial adviser will be regularly reviewing external factors which might impact your income, such as inflation and fiscal policy.

It's likely that you will also have to make some big decisions about your pension. Do you withdraw 25% of your pension as a tax-free lump sum, or do you leave it in there to continue to be invested and continue to benefit from potential compound growth? These are complex choices which your financial adviser will help you decide by assessing your individual objectives and circumstances.

“You spend your life investing for growth, but when you reach retirement age it’s time to have a general sort out and look at additional income streams,” says Latham. “It’s important to understand your goals. You might be looking to help your grandchildren or buy a holiday home in the sun or downsize. When there’s something to pay for, there's always something to save for. That's why it's so important because a financial adviser will tell you the most tax-efficient way to take an income and manage your wealth as a whole portfolio rather than just one thing.”

80+ the importance of protection and estate planning

Though few people like to face up to their mortality, it’s a critical element of good financial planning. But don’t make the mistake of assuming life protection is only for people of a certain age – it’s an important part of financial planning at any age, and as a complex product it often requires expert advice to ensure you are buying the right product for you. Creating a will is also a basic yet vital part of financial planning at any age. Inheritance tax planning, on the other hand, is most certainly more commonly in demand by those approaching their latter years.

“Estate planning isn’t just about passing on money when you die – it’s also about ensuring you have enough to enjoy life now,” says Latham. “There are different kinds of trusts for protecting the value of your assets and simplifying your estate. It’s about making your assets work harder for you so you can enjoy your final years to the fullest while also being assured that your family will be looked after when you are gone.”

Ascot Lloyd’s Independent Financial Advisers can support you with trusted financial  planning through all stages of your life. To learn more, click here to book a free call back.