Planning for retirement
Last updated on 10 February 2016
Securing a comfortable retirement means making sound choices while you are planning ahead.
Even if retirement is many years away, having an idea of how much income you will need in later life will help you to set aside enough savings today.
Start by thinking about how much you might need to spend when you are retired.
Household bills, such as electricity and gas, might increase if you spend more time at home. But you might save on commuting, expensive coffees, lunches out and work clothes.
You may use a car more often once you have more free time. But if you use public transport you might have a free bus pass!
One of the biggest changes is that you may have paid off any mortgage. If you'll still have some mortgage left, you could consider withdrawing some of your pension savings as a lump sum to pay off the remaining amount or other debts.
NHS prescriptions are free from age 60 in England (and free at any age in the rest of the UK). But later in retirement, care costs may become significant.
For more on what your budget might look like in retirement see our guide.
Your main source of income in retirement is likely to switch from a salary to pensions. Some pensions provide a secure income for life – for example, the State Pension and any company schemes that promise you a set level of pension (called defined benefit schemes).
With other pension schemes (called defined contribution), you have a pot of savings and it’s up to you how you use it. You could buy an annuity if you need to top up your secure income. A lifetime annuity is a type of insurance that pays an income for life.
You could leave the rest of your pension pot invested, in which case it might provide a higher income than an annuity, although the income could fall or your savings run out later on if the investments perform badly.
Your retirement income might also be boosted by age-related state benefits, such as the Winter Fuel Payment.
Saving for retirement
Retirement can easily last 30 years or more. Saving enough to fund such a long period is costly and it’s best to start as early as you can.
There are many different ways you could save, but a pension scheme has some advantages. Joining a scheme through work means your employer will help to meet the cost by making contributions to the scheme on your behalf.
If you are topping up a workplace scheme or you are self-employed, you might save through a personal pension.
Whatever the type of pension scheme, you usually get tax relief on your contributions at least equal to the basic rate of Income Tax (currently 20%). This means, for every £80 you pay in, the taxman provides another £20.
Choosing your pension age
Currently, you can draw out your pension savings as early as age 55. From 2028 this increases to 57.
If you want to retire earlier, you will have to manage for a while without your State Pension. Moreover, the earlier you take your pension the less it is likely to be as it has had less time to grow and has longer to be paid out.