1. Work out what you need
Know what you will need – or want – to live on in retirement. This may sound like the $64,000 question, but the Pensions and Lifetime Savings Association suggests a minimum of £10,200 for a single person, with £20,200 providing a moderate income and £33,000 a comfortable standard of living. For couples, these figures increase to £15,700, £29,100 and £47,500. See the Retirement Living Standards website for more details.
2. Everyone has different needs
Consider any extra commitments you might have in retirement. You may want to help younger family members through university or with a deposit on a house, or have care costs for an older relative. You might even have expensive hobbies!
3. Assess your likely income
Once you have a figure in mind, work out your likely retirement income and see whether the two match. Look at your NHS, state and any other pensions, plus other sources of income such as rents from property. You might also consider doing some part-time work in the early years of retirement or dipping into your savings.
4. Don’t forget tax
You will still have to pay tax – but not National Insurance (NI) – on your retirement income, so your gross income will need to be higher than the post-tax figures above. As a guide, if you have an income of £80,000 before retirement you will have about £4,040 in your pocket each month. To reach the same net income in retirement you will need a gross monthly income of £5,000. That’s £60,000 a year.
5. Check your state pension
The full state pension is worth nearly £9,000 a year and is an important part of your pension planning. When you can claim it depends on your age now; how much you get depends on your contributions record. You can check your entitlement online at the gov.uk website.
6. Mind the gap
If you’re planning to retire between 60 and 65 with an NHS pension you will have to wait before you can claim your state pension, so you will need plans to bridge this income gap. If you are in the 1995 section of the final salary scheme, you will get a tax-free lump sum on top of your pen-sion which may help. You can also withdraw up to 25% of your pension savings tax-free in one go regardless of which scheme you are in – but be cautious because this will reduce your yearly pension in the future: if you withdraw £12,000 in cash, your pension will drop by £1,000 a year.
7. Got a hole?
You may be able to fix it, as long as you’re some distance from retirement. If there’s a gap in your NI payments affecting your state pension, you may be able to pay voluntary contributions to make up for this. Anyone who spent time at home caring for children or other people should check their NI record to ensure these responsibilities are reflected. You can also pay for an early retirement reduction buy-out to reduce your NHS retirement age – but this may be costly. If nothing else, you can build up other savings to support you in retirement.
8. Good news for some…
There are likely to be changes to the 2015 NHS pension scheme which will benefit some younger people. The Supreme Court has established that, when comparable schemes were introduced in other parts of the public sector, younger members were discriminated against because they did not benefit from the protections given to older members. The government has promised to rectify this, which is likely to mean more generous pension rights for younger members.
9. …but uncertainty for others
Not all changes may be good news. Once the government has dealt with the past discrimination against younger people, it will need to think about how to avoid such discrimination in the future. This will be an area of great interest and no one knows what will happen next.
10. Think twice about leaving
Huge bills for breaching the annual pension allowance have attracted much press coverage and led to many senior managers and clinicians leaving the NHS scheme. But, depending on your circumstances, it may be better to stay in even if you’re likely to get a tax bill. This is a complex area and one where you need to take specialist advice.
Dale Walmsley is an actuary with First Actuarial. For further information visit www.firstactuarial.co.uk or email Dale at: dale.walmsley@firstactuarial.co.uk.