Your pension plan is there to help you fund your life in retirement. But how can you make your pension savings last for as long as you need them to when the cost of living has gone up so much? We have some tips that could help you prolong your retirement income while costs are high.
How high costs affect your pension savings.
It’s no secret that life has become more expensive. Interest rates are higher than they’ve been for almost 15 years, meaning it could now cost you more to pay back money you’ve borrowed, like a mortgage. And essentials like food and energy have gone up in price.
What does this mean if you’ve started accessing – or will soon access – your pension savings? Basically, your money probably needs to stretch further now. This means you’ll need to be extra careful that you don’t use up your pension savings too quickly and risk them running out further down the line.
Remember, you can normally take your pension savings from age 55 (rising to 57 from 6 April 2028). 25% of your plan’s value is normally tax-free.
First of all, understand how much you need in retirement.
When you take your pension money, anything above your 25% tax-free entitlement will normally be taxed in the same way as income. Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.
So, if you were to take a much bigger lump sum than you actually need, you could end up with a large tax bill and less money in your pension plan in future. Understanding how much money you’re likely to need in retirement could stop you from taking too much from your pension plan now.
Look at your outgoings to get a clearer picture of where your money’s going. It might be worth having a budget and seeing if you can adjust your spending. There won’t always be areas where you can cut back. But if there are, you might be able to take less from your pension plan.
You could also check the Retirement Living Standards from the Pensions and Lifetime Savings Association. The standards have been updated to reflect rises in the cost of living. They show how much money you might need (after tax) each year, depending on your lifestyle in retirement.
Don’t forget, life expectancy plays a part in how much you might need in retirement. The longer you live, the longer your pension savings need to last.
According to the Office for National Statistics (ONS), the life expectancy for a 66-year-old male is 85 years old. For a 66-year-old female, it’s 87. So if you retire at 66 (current State Pension age, rising to 67 by 2028), your pension savings may need to help support you for another two decades.
Overall, working how much you might need could be a good starting point when it comes to making sure you’ll have enough in your pension pot later.
More tips on what to consider when planning your retirement in our next article.