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  • How to avoid running out of money when you retire

    Nearly one million British pensioners are currently still working. Why? It may well be because they cannot afford to retire.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Nearly one million British pensioners are currently still working.

    Why? It may well be because they cannot afford to retire.

    The gap between how much people save and the retirement income they expect is estimated at £1.2 trillion. That's a shortfall of £50,000 for every person of working age - two years' gross salary for the average UK worker.

    And this gap can only go one way: larger and larger.

    We are living longer - the average life expectancy is now 85 for men and 89 for women, according to the Office for National Statistics (ONS). This means we can enjoy the pleasures of life for longer, but also that we'll be spending for longer.

    What can you do to prevent running out of money?

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    Will you too have to work into retirement?

    By planning for your future whilst you're still in work, you could avoid working longer than you intend.

    Pensions are one of the most tax-efficient ways to invest for retirement. The government automatically pays 20% of your contributions through tax relief. You may be able to reclaim even more if you're a higher or top rate tax payer. You could take up to 25% of your pension as a tax-free lump sum and a taxable income from the rest when you retire, usually from age 55. Please note, the amount of tax relief will depend on your circumstances and tax rules can change.

    How much should you save?

    Only you can decide how much to contribute. However, broadly speaking, if you want to retire at 65, you should divide your current age by two, and contribute this percentage of your earnings to your pension each year.

    For example - if you start saving when you're 20, consider putting aside at least 10% of your income until retirement. If you start at 40, consider at least 20%. You should also make sure you maintain this percentage as your earnings increase. The sooner you begin to contribute to your pension, the lower the percentage of your earnings you need to contribute.

    Remember, you can make these contributions either as a lump sum as and when you can, or as regular monthly payments.

    None of us are able to accurately predict what we will need in retirement, what inflation will be or what return investments will give you. However, the more often you review your pension, the more accurate a picture you will get.

    Is your pension on track? Free online pension calculator tells you
    Discover the retirement income you could receive and how much you should consider saving to meet your target.
    This free online pension calculator gives you a good idea

    What if you have a pension already?

    The three main factors that affect the size of your pension – and could ultimately determine if you'll run out of money – are how much you save, how early you start and the performance of the investments you choose.

    Yes, that's right. Contrary to what many think, when you put money into a pension, that money is invested. The better your investments perform, the more your pension will grow, although there is no guarantee: investments can fall as well as rise in value so you could get back less than you invest.

    Take a look at an example. A 35-year-old with a £20,000 pension pot could have a fund worth £55,270 by the age of 65 if his investments grow by 5% a year. His fund might be worth £97,347 if they grow by 7% a year or £169,669 if they do extremely well and grow by 9% a year (in all cases after an annual fund management fee of 1.5%).

    So even a seemingly small difference in annual performance can have a big impact on the final value of your pension pot.

    Are you missing out? You won't know until you get those papers from the bottom drawer and have a good look at your pension.

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    What do you need to watch out for? What simple steps could you take to improve your pension?

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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