Planning for Retirement: Making Sense of Your Pension

Paul Day sets out how chemical engineers can plan early, track their pension pots and make informed decisions for later life

PLANNING for retirement isn’t a topic that many of us relish. For some, it can be because of worries about when, or even if, they can afford to retire. For others, particularly those in the early stages of their careers, retirement can feel like a distant dot on the horizon. But taking small, informed steps early on can make a meaningful difference to your future financial security.

Planning your retirement

The first step is to start thinking about what your retirement will look like. Where will you be living? Will you need to support others, whether children, grandchildren or elderly parents? How will your career look – will you want to completely retire from work, or gradually wind down into part-time or consultancy roles?

These are some potentially large and open-ended questions that you might not have all the answers to yet but it’s still worth taking the time to consider what your retirement and finances might look like.

Identifying how much income you’ll need is a good start. One tool you can use is the Retirement Living Standards, developed by the Pensions and Lifetime Savings Association (PLSA) in collaboration with Loughborough University.

The standards break down the estimated costs associated with living in retirement, depending on your circumstances and lifestyle. While everyone’s individual situation and priorities will be different, the standards are a useful yardstick to give you a figure to aim for. This is also a great opportunity to have a conversation with your partner if you’re planning your retirement together.

Your income in retirement

Once you have a figure in mind, you can then move on to planning how you will achieve this. Most people draw on several income sources in retirement, depending on their circumstances. These may include the State Pension, workplace or private pensions, savings, investments, property or inheritance.

The State Pension is one of the cornerstones of retirement income in the UK. State Pension age is currently 66, gradually rising to 67, and is due to rise further to 68 for people born on or after 6 April 1978. Your entitlement is based on your National Insurance (NI) contributions.
Ten qualifying years are needed to receive the basic State Pension and 35 qualifying years are required for the full State Pension, currently £230.25 per week.

It’s a good idea to check your NI contribution record online to see if you have any gaps and consider whether making voluntary contributions to fill them would be appropriate. Your State Pension is taxable if your total income exceeds the current personal allowance of £12,570.

Your career as a chemical engineer may have led you to work outside of the UK. Certain countries have social security agreements with the UK, such as countries within the European Economic Area, Canada and New Zealand. Time spent living or working in these countries could be added to your UK NI record. You should speak to the International Pensions Centre for further advice.

While this reflects the current State Pension framework, it may change over time – particularly if your retirement is still many years away. While it’s important to consider the State Pension as part of your retirement plan, try not to rely on it entirely for financial security.

Building your private pension

Most people are enrolled in a Defined Contribution (DC) pension plan through their workplace. Your pension pot will build throughout your working life as you pay into it and your pension provider will put this into investments such as shares.

One option to build up your pension pot is salary sacrifice, which is used by an estimated 7.7 million people. This means you will give up part of your salary and your employer pays the same amount into your pension. Because your salary is reduced, you usually pay less income tax and NI, while your pension contribution remains the same.

At present, there is no limit on how much you can contribute to your pension via salary sacrifice, provided your salary is above the minimum wage and your total pension contributions do not exceed £60,000 annually, including contributions from your employer. This will change from April 2029, when only the first £2,000 of contributions to your pension through salary sacrifice will be exempt from NI.

You can normally access your pension from age 55, rising to 57 from 2028. If you don’t need to draw your pension immediately, you can delay taking money from it and your pension pot will continue to grow tax-free. You can continue to contribute up to £60,000 per year or 100% of your earnings (whichever is lower) until the age of 75.

There are several options for how you can access the funds in your pension. Up to 25% of your pension pot can be taken as a one-off, tax-free lump sum when you first access your pension. You can choose to convert the rest of your pension into an annuity for regular income, either over a fixed period of time or as a lifetime annuity. You could also keep the funds invested and take income as and when you need it, otherwise known as pension drawdown. Some people also prefer to take some or all of it as cash.

Each option carries different tax and risk considerations, so guidance from services such as Pension Wise can be valuable.

Keeping track of your pensions

As you progress through your chemical engineering career, it’s common to accumulate several pension pots with different employers. These do not automatically move with you when you change jobs, which can make them hard to track. One option is to consolidate them into a single pension, making management simpler and easier to monitor. You can do this by applying to your new pension provider for a transfer and they’ll manage this process for you. It’s worth checking what level of charges you’re paying and whether there are any additional exit fees or benefits associated with your current pension scheme before making the switch.

You should also check to see whether you have any additional pension pots that you have forgotten or don’t know about. It’s estimated that there is over £30bn in unclaimed, lost or inactive pension pots. Being reunited with a lost pension could make a significant difference to your retirement funds and the government has a free pension tracing scheme which you can use.

If nothing else, take these steps

If retirement planning feels overwhelming, start with a few simple actions:

• Check your State Pension forecast to understand what you are currently on track to receive
• Review your National Insurance record and identify any gaps
• Locate all your pension pots, including those from previous employers
• Check contribution levels in your current workplace pension and whether salary sacrifice is available
• Keep your details up to date with pension providers so you can easily track your savings

Even small steps taken now can make retirement planning clearer and less daunting over time.

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All the information within this article refers to pensions within the UK. For those living outside the UK, please seek advice from local sources. For example, Money Smart in Australia (bit.ly/money-smart-australia), EPF advisory services in Malaysia (bit.ly/epf-advisory-services) and the Retirement Planning Council in Ireland (www.rpc.ie).