What Steps Should You Take When Investing Your Pension?

Investing your pension pot is a great idea. If done well, it can mean that the amount you save towards your pension is healthily supplemented and has a better chance at lasting for the entirety of your retirement. While many of us want to do this, it can be confusing to know where to start. From choosing your scheme to maintaining it, there’s a lot to consider to make sure that we’re getting the most out of our pension. Here are some top tips to get you started…

How to choose your product

When you’re selecting the scheme you want to invest in, make sure you understand what is available to you. One option is an income drawdown scheme. This allows you to take out some of your pension while the rest remains invested. In the simplest of forms, this is an investment portfolio that allows you to withdraw an income to live on. You’ll need to plan out your money well with these schemes, to ensure money doesn’t run out before you die.

Another option is to buy a fixed-term annuity. This is a short-term investment product that allows you to let someone else make the decision as to how you fund retirement, or even delay when the decision is made. The length of the term can vary but it is often two, three or four years. The  advantage is that you can’t alter them, like a regular annuity which lasts the rest of your life.

How much should you take?

Should you take out a drawdown scheme, you’ll need to carefully consider the amount you want to take out as income. Although you can expect to add to the amount, through good investments and interest, you’ll still need to ensure that there is enough money to last you. A good rule of thumb is to allow yourself around 3.5 to 4% per year of your total amount. Using this model, you’ll need to work out how much you need to live off a year and use this as a guide for understanding the figure you need to save.

For example, if you need £12,000 a year and take this as 4% of your total amount, you’ll need to save around £300,000 to be able to do this.

You should also be aware that the amount in a drawdown scheme can decrease as well as increase. This means that you may have to reduce the amount you take as income or save more if you want your money to last.

How to minimise your risk

As your investments can go up and down, its best to spread your assets to decrease the amount of risk you are taking. There are several great options available that will allow you to spread your investments, while still giving you good returns on investment. Shares, corporate and government bonds, cash, commercial property and more complicated investments like private equity and hedge funds, or absolute return funds, are some options you can take.

While diversifying your investments doesn’t eliminate all risks, it does help to minimise any damage done should one of your investments tank.

How to review your investments

No matter how strong the investments are, you should constantly evaluate their performance. It’s no use setting up your pension scheme and then leaving it until you retire. Experts recommend that you should check your investments at regular intervals, such as once a year. It’s a good idea to always do these checks at the same time every year so you can make a year-on-year comparison.

While it’s important to check up on your investments, don’t do it too often or you risk being too tempted to make lots of small changes which can rack up extra charges.

Before investing your pension or making any major changes to your scheme, it’s a good idea to consult a professional financial adviser. This will give you personally tailored advice, designed to give you the most out of your pension.

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How Much Should You Be Saving for Retirement?

How much money have you saved for your retirement? It’s hard to think about it while we’re still working, but it’s a question that must be asked. Most of us are saving in a pension or investment scheme, yet aren’t sure what the right amount is. On top of this, the average life expectancy is rising, making it difficult for us to know how much income we’ll need should our retired life be longer than expected.

This confusion is leading to widespread confusion and problems. According to figures released by the Government in a study of its flagship workplace pension scheme, 4 in 10 of us are underestimating how much we need to set aside. Half of under-savers are earning at least £34,500 a year. This means that around 6 million middle-class workers are going to experience a drop in their standard of living when they retire due to a dramatically decreased income. This week, we’re walking you through how much you’ll need to save to make sure you’re comfortable in your retirement.

Working out how much you’ll need

It’s always worth starting your planning with the basics. Trying to roughly calculate how much your retirement outgoings are will give you the best guide for your ideal income.

A great place to start is with your mortgage. As one of the most consistent costs we all face, you’ll be able to judge this amount easily. If you’re close to paying off your mortgage or have even paid it off, this will lower the amount you’ll need to save for retirement.

The Office for National Statistics says that the average annual food spend is £2,808, while gas and electricity works out at around £1,253. These numbers will also rise with inflation.

After this, you’ll need to take your lifestyle into account. If you’re the type of person who will want to spend their retirement on holidays, taking up new hobbies or enjoying meals out, you’ll increase the amount you’ll need to save. Careful saving now can lead to more comfort and adventures in retirement!

On top of this, you’ll need to take practical concerns into account. If your partner is relying on your pension, you’ll need to save more. Should you decide to downsize house, you could find yourself having more free money. As some events are unpredictable, you’ll want to leave yourself with some flexibility should dramatic changes occur.

Taking your money as an annual income

The amount of income you should be receiving each year is a debatable topic and is reliant on factors including how much you earn, where you live and how much of your mortgage is left to pay. As a general rule, most experts agree that it should be around two-thirds of your final salary. If you, for example, finished work on an annual salary of £30,000, you should be aiming for an annual retirement income of £20,000.

According to an analysis by the Department for Work and Pensions, if you are on £13,000 or less, you should be aiming to have around 80% of your salary in old age. This equates to around £10,400 per year. On the other end of the spectrum, if your final wage is more than £55,000, you’re recommended to save for an annual income of 50% your final salary. This works out at around £27,500.

Your situation depends entirely on personal factors, meaning it is best to get tailored advice. This can be done by contacting a professional financial advisor for guidance.

Is a lump sum better?

If an annual salary isn’t for you, there is also the option to take a lump sum. To do this, you’ll need to set aside a lump sum that is approximately 10 times your final salary. For example, if you end your career making £32,000, your lump sum should ideally be valued at £320,000. This amount, along with interest, is advised to see you through old age.

These savings can be done through a pensions scheme, in a personal savings account, such as an ISA, or achieved through investments.

Both a lump sum and an annual salary are good options for retirement. Whatever you choose to do should be suited to you. Its best that you choose the method you feel most comfortable with to give you peace of mind in retirement.

Saving money for your pension can be daunting, but is important. With careful planning, you’ll be able to achieve a comfortable and relaxing retirement.

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