Is Your Pension Working for You?

Retirement planning is a key aspect of effective personal money management. Pensions, annuities, savings, and securities investments are often part of a person’s plan, accounting for a package of resources to fund comfortable retirement. Unfortunately for many Britons, pension performance has fallen apart during the past decade, leaving today’s savers with a dwindling pension pot.

Sliding Returns

State and private pensions are bedrock of retirement funding, so workers count on these vital retirement resources to perform as expected. When tides turn and pensions slip, workers face the very real possibility of running out of money during retirement. Making matters worse, Britons have lately been hit with multiple financial strikes, including falling wages, low investment returns, rising inflation, and poor annuity income. The persistent storm of bad economic news has led to a stunning revelation, recently shared by investment giant Fidelity. According to Fidelity’s findings, people retiring this year will have set by approximately £40,000 less when it’s time to leave the workforce than similar workers did for retirement in 2007.

Diminished retirement savings is never good news, but finding you’re worse-off than would-be retirees were a decade ago is a devastating shred of data. For a hypothetical worker earning £45,000 annually, pension savings for ten years might have been around £180K in 2007. Between 2007 and 2017, on the other hand, pension savings for a similar worker might only amount to £139,000.

As if the news isn’t bad enough for workers running out of productive years, surging inflation adds another troubling wrinkle. The price spike impacting consumer goods effectively wipes buying power for retirees and people planning to exit the workforce. It is thought each retiree must come up with an additional £700 a year to keep up with rising inflation. Those relying on defined benefit schemes are most vulnerable to price spikes, so the current 2.6% rate of inflation growth hits retirees hardest. And for workers still on the job, but nearing retirement; shrinking buying power comes at the wrong time. The cost of living increase prevents many of these would-be retirees from boosting their retirement savings with a strong finish.

Financial Relief for Lagging Pensioners?

When money problems arise, a number of funding sources can help you through a short-term cash crunch – often without a formal credit check. But setting things straight for your golden years may call for other measures. If retirement age is away in the distance for you, there is still time to make up some of the deficiencies from the prior decade. Maximising contributions and taking up employer offers, for instance, can help restore your retirement account before the funds are needed. If you’re very close to leaving the workforce, tax relief can help you make ends meet, despite dwindling reserves. You may be able to draw down your pension, rather than relying only on lagging annuity payments.

Preparing for retirement is more of a marathon than a sprint. Under ideal circumstances, you’d start saving in your 20’s and make regular contributions throughout your life. In reality, however, many Britons don’t start setting by retirement resources until they’re older. If you’ve fallen behind planning for retirement, you may still be able to increase your pension pot in the home stretch. Savers in their 40’s are advised to take advantage of money offered by employers in workplace-sponsored savings plans. The matching contributions represent free funding you can stow for retirement, so capitalising on the valuable resource is especially important when you’re trying to catch up.

One scenario outlined by Fidelity indicates a saver aged 45 could realistically set by a pension pot worth more than £100,000, before reaching retirement age. By setting by an extra £85 or so each month, from an annual salary of £31,000, a disciplined saver could amass the amount for retirement by age 68. The reason is that tax relief and employer contributions would push the amount set aside to something near £170 each month.

Whether or not accelerating contributions is prudent – or even possible, depends upon your financial circumstances. Either way, it is a good idea to review your pension status frequently. Funding a comfortable retirement doesn’t happen overnight, so staying on top of your pension gives you time to adjust and build-up the necessary reserves.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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