Pensions: The Importance of Retirement Planning
This week is Pension Awareness Week in the UK; a week for highlighting the importance of pension and retirement planning, and why taking pension advice sooner rather than later is beneficial for everyone.
Today we are introducing the New State Pension and explaining why private pension planning is also required. Throughout this week we will be writing on other topics that are commonly encountered.
The New State Pension
The new State Pension is the foundation of a retirement income for most of the UK population.
In 2024/25, the new State Pension is up to £221.20 per week (up to £11,502.40 per year) and is paid from State Pension age (currently 66, shortly rising to 67) onwards. The amount of State Pension payable is based upon your National Insurance Record, as shown in the figure below.
Individuals require at least 10 qualifying years of National Insurance Contributions to receive any State Pension, and full State Pension is paid to individuals with 35+ qualifying years.
Since 2010, the amount of new State Pension increases each April according to the Government system called “the triple lock”, to protect State Pension payments from the effects of inflation. In April 2023 and April 2024, the State Pension has seen large uplifts due to high inflation in the UK. The Labour Government has committed to retaining the triple lock throughout the current parliament, but it is an expensive policy that is subject to review.
You can check your National Insurance Record online. There is also further information about qualifying years, National Insurance credits and voluntary National Insurance Contributions.
A State Pension forecast can be requested online anytime or by using the BR19 form. Obtaining a forecast is highly recommended as a precursor to seeking advice on retirement planning, as it will give you the foundation for building your retirement financial plan.
Is the New State Pension enough?
An annual study by The Pension and Lifetime Savings Association (PLSA), updated in July 2024, reveals that the State Pension represents only a portion of the income required to live a “moderate” or “comfortable” retirement. The State Pension alone may be able to support a “minimum” retirement, but this is unlikely.
The PLSA study indicates that:
- A two-person household will require approximately £22,400 per year to live a “minimum” lifestyle, £43,100 per year to live a “moderate” lifestyle and £59,000 per year to live a “comfortable” lifestyle.
- A single-person household will require £14,400 per year for “minimum”, £31,300 per year for “moderate” and £43,100 for “comfortable” retirement.
The State Pension simply won’t be enough for most people in retirement, so private pension funding is imperative.
Defined-Benefit vs. Defined-Contribution Pensions
Private pensions broadly fall into one of two categories: defined-benefit or defined-contribution:
Defined-benefit pensions | Defined-contribution pensions |
---|---|
Pays a guaranteed income in retirement | Do not guarantee income in retirement |
Employers and employees make contributions to the pension scheme during membership | Individuals make contributions to the pension scheme during membership |
The terms of the scheme determine the pension to be paid. | These contributions are invested |
Typically, based on the scheme’s salary and number of years | Member builds up a total pension pot over time |
the terms of the scheme determine the pension to be paid | At retirement, the member has several options for taking income from the pension. |
Defined-benefit pensions are increasingly rare for new members, except those working in the public sector, but many older workers may be members of schemes from previous employment. | Defined-contribution pensions are the most common ones set up by employers for their employees or individuals for themselves. |
Pension Auto-Enrolment
In 2012 the Government launched an initiative known as auto-enrolment to encourage individuals to save more for retirement. Employers are obligated to enrol their staff into a workplace pension scheme and ensure sufficient contributions are made. Since 2019, broadly, the total minimum contribution is 8.0%, with at least 3.0% of the contribution to be made by the employer. Workplace pension contributions should be displayed on your payslip, and you should also receive annual statements from the pension provider.
Workplace pensions setup in response to auto-enrolment are commonly invested in default collective funds which may or may not be suitable for your current and future circumstances. It is important to review the pension to ensure that the investments are suitable for you.
Personal Pensions
Personal pensions have been widely available for many years and can be arranged by anybody who wishes to save for retirement. Savings are invested by the pension provider and depending on the provider there may be multiple ways to take the funds in retirement.
Personal pensions are setup directly with a provider and contributions are made directly. The contributions are treated in the same way as contributions made through a workplace pension and can be made before or after tax is deducted, which affects eligibility for tax relief at source. Investors choose their own investments, often with little input from the provider on the suitability of the selection.
How much might I need in private pensions?
According to the PLSA study**:
- A two-person household would need a pension pot of around £377,000, alongside two full State Pensions, to produce the annual income of £43,100 for a “moderate” retirement via pension drawdown
- A single-person household would need a pot of around £375,000, alongside one full State Pension, to produce the annual income of £31,300 for a “moderate” retirement via pension drawdown
If you wanted to purchase a Pension Annuity (a guaranteed income for life) to supplement your State Pension(s) you would likely need more than £400,000 in your pension pot.
** The PLSA Study figures are based on income drawn over 20 years, with investment growth at 3.0%, inflation at 1.0% and charges of 0.75%.
How can Coole Bevis help me?
At Coole Bevis, we can help you quantify your retirement goals and objectives and develop a strategy to work towards them. Your financial plan can be personalised to your current and expected future circumstances and will include investments which are suitable for you. Our ongoing review services will ensure your plan is continually tailored to your circumstances and adjusted to factor in any planned (or unplanned) life events.
Our team are highly experienced at analysing and evaluating existing pension products and determining whether they are likely to facilitate your retirement goals. We continually review our panel of pension providers to ensure any new recommendations we make are to the strongest providers across the entire pension market.
If you would like to discuss pensions and retirement planning, or your finances generally, please contact us on 01903 534587.
Contributions to personal pensions and workplace pensions are typically invested in market-based funds. The value of your investments can go down as well as up and you may get back less than you invested.