It pays to be well prepared for retirement but the vast majority of us face now life after work without enough funds to keep us going.
New research by the Pensions Policy Institute has revealed that more than 90% of private-sector workers with defined-contribution pensions are still unable to afford a comfortable retirement.
So whether you're approaching your retirement years or you're just thinking ahead, making sure you have a sensible retirement plan in place can help you to prepare for later life.
How do I start preparing for retirement?
Preparing for retirement is a process best started sooner rather than later. There are a number of options for you to get prepping, but the first step is to work out what your basic retirement income is likely to be.
How to work out your likely retirement income
Your retirement income can be spread across a variety of different schemes, so make sure to check every income source available to you in order to determine the most accurate figures possible.
1. Use a pension calculator
A pension calculator can help you estimate the amount of money you will have access to when you retire. It will cover income from defined-contribution schemes (such as personal pensions). To this amount you need to add any income from defined-benefit (final salary) schemes you are a member of plus your potential state pension (see next section). This information will help you work out if you're set for a comfortable retirement, or if you need to make some changes to boost your post-work finances
2. Get a state pension statement
The government's state pension age (SPA) has risen in recent years to reflect our ageing population. This means that people are not able to access this regular, government-provided income until later on in life. Previously, the SPA had been set at 65 years, but the age at which you are eligible to access a state pension now depends on when you were born. As of June 2021, the SPA for both men and women is 66, but is scheduled to rise to 68 over time. You can check your own state pension age via the official state pension age calculator.
Even if you have to wait a while to get it, a state pension can give your post-work finances a substantial boost, depending on your national insurance contribution record, as you could be eligible for up to £179.60 per week. That equates to £9,339 per year.
A state pension forecast will help you to gauge how much you can expect to receive from the government. Check out our article "Will I get a state pension?". Alternatively, the GOV.UK website has a handy calculator for you to check your state pension forecast.
3. Track down any lost pensions
Your pensions do not automatically carry over when you move across different companies, although they do still belong to you. When you get a new job at a new company, you will be enrolled in a pension scheme for that firm, but you are still entitled to the pension from your previous role. It's not uncommon for a single person to have as many as 10 or 11 different pensions split across all their previous employers throughout their lifetime.
Pensions spread across a large number of employers can be difficult to keep track of (unless each employer offered a NEST pension), so it's wise to consider using a pension-consolidation specialist to combine all of your pensions into a single pot to make them easier to manage. You could find that you have funds from previous pensions that you had forgotten about.
At present, you can trace lost pensions from previous employers using the government's free pension-tracing service, but it can be a long-winded process and you're still left with deciding what to do with them. PensionBee* provides a service which enables you to combine all of your existing pensions together, and you can even consolidate them into a new low-cost pension plan at no initial cost. The new scheme will then be managed by a third-party investment company (BlackRock, HSBC, State Street Global Advisors or Legal & General).
Eventually you will be able to manage, top-up, and view your PensionBee* pension online or via their smartphone app. For more information, visit our PensionBee review.
Alternatively, for the self-employed, there are still options to build up a pension pot without employer contributions. You can choose from the different kinds of personal pensions, or you can apply to be enrolled in the government's NEST (National Employment Savings Trust), as long as you are either self-employed or a single-person director of a company and between the age of 16 and 75.
For more guidance on the options available for self-employed pensions, visit our article "Which is the best pension if you’re self-employed?".
4. Decide between an annuity and a pension drawdown plan
When you start to approach retirement age, it's a good idea to decide exactly how you are going to spend the money that you have spent so many years saving up. You have 2 options in this regard: an annuity (a guaranteed income for a fixed term or until death) or drawdown (withdrawal of funds from your pension pot at your discretion, eligible from the age of 55+). For a full explanation on both, check out our articles "What is an annuity and how does it work?" and "What is pension drawdown and how does it work?". The pension calculator mentioned earlier in this article assumes that you take an annuity at the point of retirement.
Below is a table which explains some of the key differences between an annuity and drawdown to help you decide which might suit you best:
| Taking an annuity | Taking a drawdown | |
| How much income will I get from my pension? | This will depend on your age, health and a variety of other factors, such as the size of your retirement fund. | You can take up to the total amount of your pension pot in a lump sum or in smaller instalments. |
| How much of my pension pot will be passed on to my family when I die? | None, unless you pass away during a guarantee period (this is an annuity option that guarantees your annuity will be paid for a minimum period - typically 5 or 10 years - even if you pass away soon after purchasing the annuity). | Your family will receive any money remaining in your pension pot. This will be taxable if you die aged 75 or older. |
| Is this income guaranteed for life? | Yes. | No. You can only take an income from your pension as long as you actually have money in your pension pot. If you end up withdrawing your pension repeatedly over a long period, or you take out a large lump sum, there is a risk that you will have a reduced income later on and have to rely on the state or any other assets, savings, or investments. |
| Can I change later on? | Most annuities will not allow you to change at a later point. | You can purchase an annuity instead at any point. |
| What about tax? | Annuity income is treated like employment income and is subject to income tax if your total income is above the income tax threshold. | Income taken directly from the fund is also treated like employment income, so if you have a very large pot, you may end up paying as much as 45% tax on it. |
| Is there any investment risk? | No. Your annuity is guaranteed for life. | Yes. As your pension remains invested until you withdraw it, there is the chance that your pot could go down in value due to poor investment performance. |
| Are there other options? | You can set up a joint annuity with a family member or partner, which allows for the regular payments to continue until both beneficiaries pass away. This can be set up to pay the same amount, or a reduced amount, after the first death. | You can opt for a part and part option, which allows you to purchase an annuity with some of your pension pot, and leave the rest invested for you to withdraw at your discretion. This could potentially provide an inheritance for your family (providing you have not withdrawn your entire pot by the time you pass away), but beware that this could be subject to inheritance tax if the amount is over the minimum inheritance tax threshold. |
How can I boost my pension?
There are several different ways that you can boost your pension to make it last throughout your retirement. As always, it's best to start these earlier on so you have as much time as possible for your savings to add up before you need to start spending.
1. Claim your tax relief
Pension contribution tax relief can give a substantial boost to your retirement savings by increasing the size of any pension contributions. People in different income tax bands are eligible for different degrees of relief, however, with the rules as follows in England, Wales and Northern Ireland:
- Basic-rate taxpayers get 20% pension tax relief on pension contributions
- Higher-rate taxpayers can claim 40% pension tax relief on pension contributions
- Additional-rate taxpayers can claim 45% pension tax relief on pension contributions
In Scotland, income tax is banded differently, so pension tax relief is applied in a slightly different way:
- Starter rate taxpayers pay 19% income tax but get 20% pension tax relief
- Basic rate taxpayers pay 20% income tax and get 20% pension tax relief
- Intermediate rate taxpayers pay 21% income tax and can claim 21% pension tax relief
- Higher-rate taxpayers pay 41% income tax and can claim 41% pension tax relief
- Top rate taxpayers pay 46% income tax and can claim 46% pension tax relief
Non-taxpayers, including spouses who aren’t in employment and children are eligible for tax relief of 20%, even though they don’t pay tax.
The maximum amount of pension contributions on which you can earn tax relief is called the pensions annual allowance and is currently £40,000 for the 2021/22 tax year or 100% of your earnings, whichever is lower.
To claim your tax relief on pension contributions which isn't automatically claimed by your pension provider, you’ll either need to register for self-assessment and fill in a tax return each year, or contact HMRC with details of your scheme and contributions you have made.
2. Find out if you are eligible for pension credit
Pension credit is a means-tested government benefit for retired people. It’s made up of two parts: guarantee credit, which tops up your income if it's low, and savings credit, which is an extra payment for those who have managed to save a bit for retirement.
You’ll need to be over the state pension age, which depends on your date of birth, in order to be eligible for pension credit. State pension age is currently 66 for both men and women, but will rise to 67 between 2026 and 2028, and then up to 68 between 2037 and 2039.
If you live in the UK and your income is between £153.70 - £177.10 a week as a single person or £244.12 - £270.30 as a couple - and you or both of you reached the state pension age before 6 April 2016 - you could be entitled to claim guarantee credit. The government claims that around 1.3 million households are eligible for pension credit but aren’t claiming it, which amounts to each family losing out on approximately £2,500 per year.
You can directly call the government’s pension credit claim line on 0800 99 1234, visit GOV.UK, or make a paper application. You’ll need your National Insurance number, information about your income, savings and investments, and your bank details.
Usually, if you can claim pension credit, you will also be eligible for other benefits such as lower council tax, cold weather payments, and free dental care. AgeUK has a useful free-to-use benefits calculator for you to work out what you might be entitled to.
3. Delay releasing your pension
Delaying when you start withdrawing your retirement income from your pension pot could help you maximise your savings and even get an additional boost depending on how long you defer for. You can delay releasing your pension for as long as you want, and while it can be tempting to start spending as soon as you retire, biding your time even for just a couple of months can give
How much you can get from delaying your pension all depends on whether you qualify for the old state pension or the new state pension system.
If you reached your state pension age on or after 6 April 2016 (therefore receiving the new state pension), you get a pension boost of 1% for every 9 weeks you defer. This comes to 5.8% extra a year on top of your regular state pension. So, if you claimed the full new state pension of £179.60 a week, by deferring for 52 weeks you would get an extra £10.42 a week - a total of £541.84 for the year.
If you reached your state pension age before 6 April 2016 (therefore receiving the old state pension), you can choose to receive a lump sum or higher weekly payments (you also get interest of 2% above the Bank of England base rate if you defer for at least a year). Your state pension increases 1% for every 1 week you defer, as long as you defer for at least 5 weeks, equivalent to a 10.4% rise per year. If you claimed the full old state pension of £137.60 a week, by deferring for 52 weeks, you would get an extra £14.31 a week - which works out to £744.12 a year.
However, the actual amount you get will often be more than that because of the “triple lock”, which guarantees that the old state pension will rise each year either by 2.5%, the rate of inflation, or average earnings growth - whichever is the highest.
You can use our pension calculator to see how much extra you could get if you decided to also defer your personal defined contribution pensions and see whether it’s worth delaying retirement or not. Just enter your details, and once you have your results, you will have the option to see how your pot would be affected if you "delay your retirement".
4. Open a savings or investment account
As well as a standard pension arrangement, you are also free to set up savings or investment accounts to help fund your post-work lifestyle and complement the funds that you have already saved in your pension pot.
You can open a standard Independent Savings Account (ISA) - for storing money away while you wait for your provider's interest rates to make you a profit - and you can also make use of the government's Lifetime ISA (LISA) scheme, which offers all the usual tax benefits of a standard ISA but with the added bonus of a 25% boost provided by the government, with a total annual limit of £4,000. Lifetime ISAs are specifically designed to help first-time buyers and those looking to save for retirement only. It is possible to open both an ISA and a LISA, but the maximum amount of money that you are allowed to put into savings in the 2021/2022 tax year is £20,000, which means that you cannot exceed the £20,000 savings threshold across both an ISA and a LISA.
For more information on ISAs, check out our articleThe different types of ISA explained, "How to choose the best ready-made ISA portfolio" and "Lifetime ISAs explained – are they the best way to save?".
Alongside any savings account that you decide to open, you are also free to set up investment accounts to help you make even more money - although you are still limited to the £20,000 upper cap across all of your ISA savings and investment accounts. These can range from a traditional Stocks & Shares ISAs and investing in funds to signing up to trading platforms such as eToro or Trading 212. Share trading is a risky strategy, however, as you are vulnerable to losing lots of money as well as gaining it. You should make sure that you understand the risks involved with investing, and limit your exposure to particularly volatile assets such as cryptocurrency, so that you don't find yourself having to use chunks of your pension to pay off losses you incur from your investment accounts.
Before you make the leap into investing for the first time, visit our beginner's guide, or browse our article "How to start investing".
The verdict
Preparing for retirement is no easy task, and it certainly can't be done in an afternoon.
The earlier you start adding to your pension pot, the more money you'll have when the time comes to hang up your working hat, and diversifying your retirement savings across different means - workplace pensions, a state pension, savings accounts, and even investing accounts - can help you to maximise how much disposable income you'll have in later life.
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