I don’t have a pension. Well, I sort of do have a tiny one, but not a proper one. I only have some savings that I started saving last tax year out of my self-employed earnings. I’m continuing this year to save too and save around 10% of my income each month. It’s not enough. I know it’s not and I need to be looking at half of age as a percentage to save according to Money Saving Expert, so that would be 16.5% of my income.
At the moment that’s just too much with two young children and also trying to save an emergency fund, which at this point of my life seems more important, especially being self-employed. I need a backup plan in case work dries up, so I must prioritise an emergency fund which will cover the bills and food if illness strikes, I can’t work for whatever reason or even if my business fails and I am out of work for a length of time.
Once that’s saved I can focus on piling more of my earnings into my pension pot. I’ll admit, pensions are something that I know little about and I’ve been learning as much as I can over the past year or so, ever since deciding I needed to do something about it. Well, more like panicking and having to do something about it!
Do you have a pension?
It suddenly hit me one day that I have no pension in place. I’ve never had a workplace pension and until now, I’ve never had any savings. I was always a spender. I’ve had to teach myself in recent years to become a saver instead. Since having children I’ve learnt to budget much better and have become more responsible with my money. So I’ve started putting away some of my income and that will be the start of my personal pension. I do need to open a ‘proper’ pension account as I just have a normal bank savings account at the moment which doesn’t give me any rewards or tax relief. The interest rate is so ridiculous they might as well not even bother. Saving into a personal pension (that’s properly set up) is a much better idea and means the government will top it up for you in the form of tax relief relative to your income tax band.
I’d love to go travelling in my 60s as I never went when younger and that’s a big regret, so I’d ideally like to retire early so I’m fit and able whilst travelling, but that’s in 30 years. That gives me just 30 years to save an entire pension! I think many of us naively think when we’re younger (I know I did) that the state pension will provide for us when we retire. It seems so far away we just ignore it and don’t do the calculations. I now realise we can’t rely on a state pension for a comfortable retirement.
Photo by Priscilla Du Preez
The current state pension is £8500 per year, that’s £708 per month. Could you live on that?
Taking into account, of course, that by retirement age you should have paid your mortgage off so that’s a chunk of your outgoings gone. But there’s still council tax, water, energy and home insurance that all have to be paid. Then, nowadays, it’s pretty vital to have an internet connection and either a home phone or mobile. Take off food, house maintenance, a car if you need one along with fuel and there’s really not going to be any money left. If you share a house with your partner then two pensions will go a lot further than one when sharing many of the outgoings. If you’re single, then I’m pretty sure relying on the state pension alone will be a struggle. It’s certainly not enough to have fun in retirement, but only to meet your basic needs (well, barely).
There is a ‘state pension triple lock’ in place with the new state pension which guarantees it will rise each year with either UK wage growth, inflation or 2.5% - the highest of these is the amount it will rise by.
That’s great as it means we should be able to still afford to meet our basic needs even as costs rise, but is it really a ‘lock’? No, as with everything in life, nothing is guaranteed. I know I won’t retire for 30 years ideally, but possibly even 40 years if I need to continue working for longer and a lot can change in 40 years. The government will change. New laws will pass. Our country will change. There might not even be a state pension by the time I retire! I’m pretty sure that won’t be the case, but who knows.
Anything can happen and I’m more aware than ever today that I need to start saving for my own personal pension and have my own retirement plan more than ever.
It's good to have a back up plan too
One thing that always makes me curious is people who rent houses. You'd have to have a much larger pension in order to rent when you are retired. We have a mortgage and so we should be mortgage free well before retirement age which means we'll have no monthly rent or mortgage payments which will greatly help reduce our outgoings.
Of course, there's another benefit to owning a home before retirement too. The home has lots of value and the equity will increase over the years, so even if for some reason we don't have enough saved for retirement, we have the security of our biggest asset - our house.
There are lots of equity release schemes, the possibility of downsizing or moving into a smaller home and so on if needs be.
One of the keys to a happy retirement is financial freedom. If you are drowning in debt, you cannot enjoy all of the extra free time that comes with no longer working. One unique way to alleviate those financial problems is to apply for a retiree-only reverse mortgage. In the UK it's more commonly known as a lifetime mortgage. If you qualify, a reverse-mortgage calculator online tool is used to see how much home equity you have and how much you can extract in the form of cash. Then the money is provided to you in set amounts each month, unless you request a large payment or other arrangement. You choose when and how much you pay back as time passes. For as long as you stay in the home, the agreement stays active.
You basically release some of the value (equity) held in your home. This, and any interest accrued, is usually then repaid when you die or when you move into a care home.
Owning our own home before we retire will mean we also have a backup plan if anything goes wrong with saving our retirement fund.
Since writing this blog post I have started saving into a LISA as well as a savings builder account. The LISA is great for those of us who are self-employed to save for our future retirement as they give a 25% bonus on up to £4000 per year. That's potentially £1000 of free cash! Read more here: Moneybox Cash Lifetime ISA for retirement: get a 25% top up on your LISA savings
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