Most of us don’t realise how affordable retirement could be


The finances of many are being impacted by COVID-19, especially those who are unfortunately facing redundancy and are approaching retirement. The over 50s are far more likely to slip into long-term unemployment, with just one in three (35%) returning to work quickly, compared to two in three (63%) workers aged 25-34.

The current crisis has caused one in eight (13%) older workers to alter their retirement plans with 8% planning to retire later, and 5% planning to retire earlier. Understandably, many employees are concerned about whether they can actually afford to retire without really realising that they may not need as much as they think.

WEALTH at work has created the four examples below to demonstrate how affording retirement can be possible for employees. The examples show how an individual may be able to achieve the same disposable income levels in retirement, or at least similar, as to what they would get from their wages, even if their pension income is half of their salary.

This is because for some people once they retire, they will be paying significantly less Income Tax, have no National Insurance or pension contributions to make, mortgages and loans may be paid off and children could be financially independent.

The following examples are for illustrative purposes only and are based on an active individual with no health issues, contributing towards their workplace pension through salary sacrifice for the tax year 2020/21, who will have paid off their mortgage and loans by the time they retire, and took their 25% tax free lump sum at-retirement (possibly to pay off the mortgage and any other debts) – meaning that all pension income is now liable for Income Tax.

Example 1:

Nathan – Earns £30,000 p.a. but needs only £19,400 income in retirement

Nathan has a salary of £30,000 p.a. and is making a 5% contribution into his workplace pension scheme.  His other current costs are:

  • £5,000 p.a. mortgage payment (he plans to clear this debt by the time he retires)
  • £3,200 p.a. Income Tax deducted from his salary
  • £2,280 p.a. National Insurance deducted from his salary

His disposable income after these deductions is £18,020.  To have the same amount of disposable income in retirement he would need a pension income of £19,400 (£19,400 minus £1,380 Income Tax leaves £18,020 disposable income).

Example 2:

Claire – Earns £45,000 p.a. but needs only £23,350 income in retirement

Claire has a salary of £45,000 p.a. and is making a 10% contribution into her workplace pension scheme.  Her other current costs are:

  • £10,000 p.a. mortgage payment (she plans to clear this debt by the time she retires)
  • £5,600 p.a. Income Tax deducted from her salary
  • £3,720 p.a. National Insurance deducted from her salary

Her disposable income after these deductions is £21,180.  To have the same amount of disposable income in retirement she would need a pension income of £23,350 (£23,350 minus £2,170 Income Tax leaves £21,180 disposable income).

Example 3:

Gabrielle – Earns £60,000 p.a. but needs only £28,075 income in retirement

Gabrielle has a salary of £60,000 p.a. and is making a 10% contribution into her workplace pension scheme.  Her other current costs are:

  • £15,000 p.a. mortgage payment (she plans to clear this debt by the time she retires)
  • £9,100 p.a. Income Tax deducted from her salary
  • £4,940  p.a. National Insurance deducted from her salary

Her disposable income after these deductions is £24,960.  To have the same amount of disposable income in retirement she would need a pension income of £28,075 (£28,075 minus £3,115 Income Tax leaves £24,960 income in retirement).

Example 4:

Jay – Earns £75,000 p.a. but needs only £31,613 in retirement

Jay has a salary of £75,000 p.a. and is making a 10% contribution into his workplace pension scheme.  His other current costs are:

  • £20,000 p.a. mortgage payment (he plans to clear this debt by the time he retires)
  • £14,500 p.a. Income Tax deducted from his salary
  • £5,210 p.a. National Insurance deducted from his salary

His disposable income after these deductions is £27,790.  To have the same amount of disposable income in retirement he would need a pension income of £31,613 (£31,613 minus £3,823 Income Tax leaves £27,790 income in retirement).

Summary of examples

The table below is a summary of the above examples, which shows the annual income individuals would need in retirement to have a similar disposable income as to when they were working. We have assumed pension contributions would increase to 10% for someone earning £45,000 and over, and that annual mortgage repayments would increase by £5,000 for every extra £15,000 earned.

Jonathan Watts-Lay, Director, WEALTH at work comments; “Facing redundancy can be a really unsettling time for employees, especially later in life when it can be more difficult for them to get back into the workplace. This is causing disruption on people’s retirement plans and is forcing many to consider retirement earlier than they anticipated.

When some see the predicted income on their pension statements and realise it is a lot less than their working income, they may be concerned. However, what many don’t realise is that they may not need as much income in retirement as they think. This is because when you retire, you will often be paying a lot less Income Tax, have no National Insurance or pension contributions, and often mortgages and loans are paid off.”

Watts-Lay concludes; “We hope these examples will encourage employees to review how much income they will actually need in retirement, and that they will hopefully be reassured that it may not be as much as they think to maintain their standard of living. With careful planning, some may even find that they are able to have the same disposable income in retirement as when they were working.

With all this uncertainty, it is crucial for employers to provide the financial support employees require through financial education, guidance and regulated financial advice. This can help employees understand their financial situation including their retirement savings and how to make the most of redundancy pay.”

*Calculations

Example 1: Nathan

£30,000 salary, minus £1,500 pension, £5,000 mortgage, £3,200 Income Tax and £2,280 National Insurance leaves a disposable income of £18,020.

£19,400 pension income, minus Income Tax of £1,380, leaves a disposable income of £18,020 in retirement.

Example 2: Claire

£45,000 salary, minus £4,500 pension, £10,000 mortgage, £5,600 Income Tax and £3,720 National Insurance leaves a disposable income of £21,180.

£23,350 pension income, minus Income Tax of £2,170, leaves a disposable income of £21,180 in retirement.

Example 3: Gabrielle

£60,000 salary minus £6,000 pensions, £15,000 mortgage, £9,100 Income Tax and £4,940 p.a. National Insurance leaves a His disposable income of £24,960.

£28,075 pension income, minus Income Tax of £3,115, leaves a disposable income of £24,960.

Example 4: Jay

£75,000 salary minus £7,500 pension, £20,000 mortgage, £14,500 Income Tax, and £5,210 p.a. National Insurance leaves a disposable income of £27,790.

£31,613 pension income, minus Income Tax of £3,823, leaves a disposable income of £27,790.



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