“A nurse aged 25, earning £21,692 typically contributes 7.1pc of salary each year to fund their retirement. If they work for 40 years, stay in the same band of earnings throughout and attain 4pc annual increases in pay, they could retire on an annual salary of £45,500 in today’s money.
This income is guaranteed by the state and will also increase each year in line with inflation, protecting its value over time.
Compare this to a private pension example, assuming the nurse saved 9pc of her salary throughout her life (26% more contributions than in the first example) and achieved 5pc net investment growth a year, she could then either purchase an annuity providing an income of £6,366 a year, or use flexible drawdown taking 4% a year to access an income of £18,320 per year.”
Even if we assume the private pension holding nurse is financially savvy enough to use flexible drawdown, she’d still have an income of almost 60% less in retirement, despite contributing 26% more plus would also be at the mercy of the stock market.
Naturally many public sector workers are keen to hang onto their pensions and work hard to achieve them, I’m certainly not saying we should reduce them rather present the opportunity that working for the government for 5-10 years can make a huge difference to your retirement income.
In all likelihood what you’re doing now exists in the public sector, whether that’s in admin, marketing or finance. Of course the lighter version of this would be finding an employer who offers a generous pension plan and ensuring your max out their contributions.
4. Don’t retire
Right, if you’ve got this far you’re probably hoping my unpopular opinions are well and truly finished with! Unfortunately for you, I have one more…Don’t retire!
This doesn’t necessarily mean I’m encouraging you into backbreaking work throughout your twilight years, rather showing even if you a have a very small income the required pension you’ll need to accumulate will be far less.
For example, if you need £1,500 to live off and you’re comfortable with a 4% withdrawal rate, you’d need approximately £450,000. Yet if you take on part-time work or start a business and earn just £500 per month you’d then only need to take £1,000 per month from your pot reducing it’s the required size 33% to £300,000.
Naturally this may not always be possible but it certainly showcases how you might bridge the gap to retirement if choosing to retire early.
But what happens if just before retiring your pension goes bust?
Have any changes been made to safeguard pensions?
As mentioned in our first post on the pension crisis in a recent study of 6,000 pension schemes, a total of at least 600 are expected to become insolvent and 1 in 6 are at risk of being bailed out by the government created Pension Protection Fund.
So what’s the Pension Protection Fund?
Founded in 2005 the Pension Protection Fund (PPF) was created as a safeguard if a defined benefit pension fund becomes insolvent.
Although as explained by Choose you may still receive a reduction in your benefits if your provider does go bust.
Or if in an auto-enrolment scheme that’s a member of the FCA or PRA you’d be protected by the FSCS for up to 90% of the value of the fund or if the money is accessed on retirement and put directly into investments up to £50k per person per provider (SIPP protection is hazier.
This is why many individuals consider spreading pension funds across multiple regulated providers.
Managed to get through all of the above? (If so, you hero!), you should now understand the very real reality of being able to retire both at retirement age or even sooner if you so wish, what first steps you may wish to take, changes you can make now which could positively impact your pension and what safeguards are in place.
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