Five steps to set goals for your pension

Setting aside enough money for a comfortable retirement can be difficult. Pension contributions often compete with other financial pressures like mortgage repayments, school fees, and rising living costs.

In fact, research cited by Trustnet found that 43% of UK households are not saving enough for retirement.

What’s more, 82% of people don’t know how much they need to retire, according to Pensions UK research.

By engaging with your pension throughout your working life, you can build a financial plan that helps ensure you’re setting aside enough money for your future.

Whilst your pension doesn’t form the entire picture of your retirement plan, it is likely to be one of the core sources of wealth you draw from when you stop working.

Whether you hope to travel the world or simply enjoy home comforts, read on to learn five steps you can take to set pension goals and save for the retirement you want.

1. Define your dream retirement

Before you begin assessing the figures in your pension statements, start by considering what your ideal retirement lifestyle looks like.

This could include a wide range of goals and preferences, but here are a few areas you might wish to consider.

• Housing: Do you want to stay in your current home, downsize, move closer to family, or emigrate overseas?
• Adventure: Are you keen to enjoy regular holidays abroad, go travelling for an extended period, or tick exciting experiences off your bucket list?
• Relaxation: Are you hoping to try new hobbies, join social clubs, or spend your days spoiling your grandchildren?
• Keeping busy: Do you want to spend some time volunteering, supporting your local community, or even keeping the family business ticking over?

Whatever a comfortable retirement looks like to you, it’s important to define your goals. If you’re unsure whether your vision is realistic, you can revisit your goals after evaluating your pension fund and other key savings pots (more on this in step four).

Of course, your goals may evolve over time, so you can tweak and refine your retirement plan as things change.

2. Decide when you want to retire

Next, consider the age at which you hope to retire. From 6^th April 2028, the normal minimum pension age (NMPA) will rise from 55 to 57 – meaning you can’t access your private pensions before then, subject to protection.

For the State Pension, however, you’ll need to wait until you are 66 to begin claiming any payments you are eligible for. The State Pension Age is set to rise to 67 by 2028.

Whilst it may be tempting to plan for the earliest possible retirement age, your desire to stop working must be balanced against the risk of outliving your savings. The earlier you retire, the further your savings will need to stretch.

You may also wish to consider a phased retirement – continuing part-time work whilst claiming a portion of your pension.

3. Calculate how much you will need to fund your retirement

Once you know what you want your retirement to look like, you can work out roughly how much you’re going to need in annual retirement income. Most of your income will likely be generated from your private pensions, with the State Pension and other savings supplementing this.

As a guide, Pensions UK have developed “Retirement Living Standards”, estimating the annual retirement income required for different standards of living.

• Minimum standard: £13,400 for one person or £21,600 for a couple.
• Moderate standard: £31,700 for one person or £43,900 for a couple.
• Comfortable standard: £43,900 for one person or £60,600 for a couple.

Remember, your lifestyle will likely change as you get older. Whilst you might have big travel plans for early retirement, you may wish to consider the cost of care for later in life.

Read more: How to navigate care costs and protect your financial future

Additionally, it’s often sensible to factor in inflation. If you plan for a retirement in 20 years’ time using today’s prices, your savings could fall short of your goals.

So, whilst these figures are a helpful benchmark, it could be constructive to speak with a Financial Planner and set retirement goals based on your unique circumstances.

4. Understand your current pension pot

The next step is to assess how much you have already put aside for retirement.

This may be a mix of:

• Workplace pensions from various employers
• Other private or personal pensions, including self-invested personal pensions (SIPPs)
• ISAs or other savings accounts
• Investments
• Properties you own
• Income from a business or part-time work.

As you read earlier, it’s likely that your pension will be the largest source of wealth you are drawing from. So, understanding what you have in your pots, and how these may grow over time, is crucial.

To gain a clearer view of your pot, it is worth:

• Obtaining pension statements from all your providers
• Assessing how much investment risk your pensions are exposed to, and the returns this could generate
• Looking at how much you’re putting in each month or year
• Getting an idea of what you’ll get from your pots at your desired retirement age, using projections from your pension provider or your Financial Planner
• Thinking about tax efficiency (more on this later).

Locating all of your pension funds from previous jobs, estimating the potential future value of assets and savings, and forecasting how investments could grow can be a complex undertaking. A Financial Planner can help you assess your finances to get a clear view of your current retirement fund.

5. Address the gap between your pension and your goals

Once you know how much annual income you may need in retirement, and how much you could afford based on current savings, you can begin planning to grow your funds to align with your goals. In your plans, you might wish to include:

• Boosting regular pension contributions
• Claiming tax relief if you’re a higher- or additional-rate taxpayer
• Maximising employer contributions
• Exploring salary sacrifice arrangements, if possible
• Examining pension fees and exploring whether they can be reduced
• Consolidating multiple pensions, if appropriate
• Adjusting your pension’s investment portfolio.

By regularly tracking your funds and measuring progress against your goals, you can stay on track to achieve your dream retirement.

Remember, when you start drawing from your pensions, you could pay Income Tax. Factoring this into your plans means you won’t overestimate how far your pot will stretch.

Usually, you can withdraw up to 25% of your pension fund as a tax-free lump sum, up to a maximum of £268,275. However, subsequent withdrawals are potentially subject to Income Tax once you have exceeded the £12,570 Personal Allowance.

Your taxable income can also include State Pension payments and other earnings, such as revenue from rental properties. So, with the Personal Allowance frozen until 2028, you may need to pay more Income Tax than you expect.

Assessing your tax position now could help you set realistic goals for pension growth and your overall retirement plan.

Get in touch

Ascertaining how to grow your retirement fund can be complex, with multiple opportunities and risk factors to consider.

By consulting with a Financial Planner, you can make a clear plan to help reach your retirement goals and retain ongoing support to make changes along the way.

Whether you’re new to PenLife or an existing client, email us at enquiries@pen-life.co.uk or call 01904 661140 to start planning for your dream retirement.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning or cashflow modelling.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pensions Regulator.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.