Bolstering your Pension Savings in each decade of your life

Securing a comfortable retirement requires early action, sound financial management and strategic planning throughout your life. Your pension shouldn’t just become an issue as you approach retirement, it is a lifelong commitment to save for your future.

To enjoy a moderate standard of living in retirement, the Pension and Lifetime Savings Association estimates that an annual post-tax income of £23,300, excluding housing costs, is required for a single person living in the UK. This allows for £74 per week for essential expenses, a car, and an annual two-week foreign holiday.

Even taking the full UK state pension into account, you would still need a substantial pension fund of around £248,000 to achieve this. But according to official statistics, over 17.7 million savers in the UK are not on track to meet this basic goal.

To manage your pension savings effectively throughout your career, periodic checks are essential. A yearly assessment will help gauge your progress and, if you find yourself struggling to meet your pension goals, this will allow for timely corrective action. A survey by Standard Life in August reported that one in seven pension savers had never examined their pension pot, with three-quarters lacking clarity on their account’s balance.

First and foremost, it’s crucial to check your pension pot’s status. Beyond this initial step, other measures should be taken to ensure your pension stays on course. Let’s explore this journey by age group.

In your Twenties: start saving

Although retirement might seem a distant prospect in your twenties, initiating your savings now is paramount to building a robust pension fund. Few people nearing retirement regret the funds they saved into their pensions; they generally regret not having started to save earlier and not having contributed more.

Depending on the size of the company you work for, in many countries you will be automatically enrolled in a workplace pension scheme. Under these schemes, both the employee and the employer contribute to the employee’s pension. Some employers even offer additional contributions by matching your pension contributions, further enhancing your savings.

If you’re concerned about inflation, a 22-year-old living in the UK would require a pension pot of £617,000 at retirement to sustain a moderate living standard. To illustrate, a 22-year-old earning £25,000 annually and contributing 8% to a pension, would accumulate only £489,606 by age 68, assuming 5% annual investment growth after fees and 2%v yearly pay raises. With a 12% contribution, this would grow to £732,909.

In your Thirties: review your investments

After several years of working, it’s prudent to evaluate your pension’s investment strategy to ensure it aligns with your risk tolerance. A survey by Interactive Investor found that around 30% of pension savers between the ages of 18 and 54 were unsure of the risk level associated with their pensions.

In your Forties: boost your contributions

While your earnings and lifestyle may peak in your forties, your pension demands attention. Maximising contributions in the years leading up to retirement can significantly impact your post-work quality of life.
Consider allocating windfalls, such as bonuses or inheritances, to your pension. You can contribute up to £60,000 annually to your pension without incurring taxes.

This is also an opportune time to locate any dormant workplace pension accounts. The Pensions Policy Institute reports that approximately 2.8 million pension pots, totalling £26.6 billion, are considered ‘lost’. Streamlining multiple pensions with a single provider can simplify administration and reduce fees but avoid transferring money from a defined benefit (final salary) pension scheme.

In your Fifties: determine beneficiaries

As well as saving, pensions offer a tax-efficient means of passing on wealth. So, while continuing to increase pension contributions, you should also be designating beneficiaries. Bear in mind that defined benefit pension schemes offer varying options for passing on benefits. Examine your scheme’s rules to see if you can nominate a beneficiary to receive a percentage of the money, a lump sum, or a return of contributions.

In your Sixties: manage withdrawals

The challenge in your sixties is to manage your pension withdrawals to ensure that your savings will last throughout retirement. Given the uncertainty of lifespan, withdrawing too much can deplete your savings, while being too cautious might leave them unutilised. Advisors typically recommend a 4% annual withdrawal rate as a rule of thumb, assuming that investment growth replenishes the funds.

However, the actual rate will vary depending on your pension scheme’s investment strategy. The MSCI UK index, tracking UK companies’ performance, has yielded an average annual return of approximately 7.1% over the past decade, with a real rate of return of 4.3% after accounting for inflation. For those paying 1.5% in annual fees, the safe withdrawal rate might therefore be closer to 2.8% to preserve the pension’s value. Careful planning becomes essential at this stage, ensuring financial stability throughout retirement.

Sovereign Pension Services

Sovereign Pension Services is the largest pension provider in Gibraltar and offers tailor-made Occupational Pension schemes, whatever your industry or company size. Whatever your requirements, Sovereign’s global footprint allows us to be close to our clients and understand their needs.

Our experienced retirement planning teams are on hand to assist throughout the process, from design through to implementation. We also have the capacity and expertise to administer schemes on behalf of employers, such that corporate clients can be assured of the maximum business benefit and the minimum business disruption.