Last Updated on 6th November 2024
Understanding the future value of your pension funds is key, whether you’re evaluating the retirement budget you’ll have following a move abroad, want to verify if your funds are sufficient to finance the lifestyle you expect, or are making conscious decisions about other investments and assets that will contribute to your retirement.
For many prospective expats and those intending to enjoy a comfortable retirement in the UK, this can be complex, especially when factoring in private and state pensions, potential changes to the British statutory retirement age, and unknown outcomes of the ongoing governmental reviews and consultations.
Here we’ll offer some clarity about how to quantify the retirement wealth you can budget against and explore some of the expected reforms to the State Pension to give you an indication.
Ongoing Changes to the UK State Pension
We’ll start with the State Pension, with a confirmed commitment to the ‘triple lock’ system, which means the entitlements will increase annually at the start of each new tax year in April based on the highest of:
- Annual earnings
- Inflation
- 2.5%
In April 2024, the average British State Pension entitlement rose by a fairly substantial 8.5% owing to the economic circumstances at the time, although this may not necessarily be replicated every year to come. For example, in April 2025, the increase will be 4.1%, based on increases in average earnings.
Of course, if inflation spikes or another unforeseen change occurs the increase could vary significantly, but the triple lock makes it difficult to predict with any accuracy what the State Pension will be worth in 10 years, or even 20 or more.
Many work on the conservative assumption that annual rises will be equivalent to 2.5% as the lowest variable, but it’s also important to verify that you have contributed sufficient National Insurance Contributions to receive your full entitlement.
While not always the largest element of your retirement savings, the State Pension is today worth £221.20 per week, or just over £11,500 a year and may increase considerably depending on the time you have until retirement. Therefore, it remains worth having.
Should you be approaching retirement, you may wish to consider contributing voluntarily if your National Insurance Contributions don’t currently entitle you to the full State Pension.
Adjustments to the UK Statutory Retirement Age
Another element to consider is the change to the retirement age, which is expected to rise to 67 for both men and women within the next two years, which could impact the date at which you can begin claiming the State Pension.
If you have alternative income sources, that may not impact your plans or influence your intention to retire earlier, but it is worth bearing in mind when calculating your full retirement income.
Deferring your State Pension is also an option, depending on your retirement plans, although this could influence the amount you receive, albeit with a potential increase in the entitlement by as much as 5.8% a week for each year you postpone claiming.
Calculating the Value of Private UK-Based Pension Funds
Assessing the projected value of a private pension fund can be equally difficult, not least because this will depend heavily on the nature of your pension.
Defined benefit schemes, for instance, are typically more straightforward since your pension value should be clarified within your policy details, normally linked with your salary at retirement.
However, you can also request a statement since some defined benefit plans assess the final value of the pension based on the number of years of service and use an accrual rate that determines the actual annual benefit receivable.
Defined contribution schemes are less certain since the eventual value of your pension, particularly if you are some years away from retirement, will be influenced by the level of risk associated with the funds your pension assets are invested into, the amounts you contribute, and any contributions made by an employer if your fund is a workplace-based pension.
One of the easiest solutions is to use an online pension calculator, request an annual statement, or apply for a pension forecast. Remember that some pension funds can decrease and increase in value, and it may be nearly impossible to predict variable returns with 100% certainty.
Projecting your pension value accurately may also be essential to succession and inheritance planning, owing to the new Inheritance Tax (IHT) rules which mean that, from April 2027, pension benefits passed to beneficiaries will be subject to the tax.
Safeguarding Your Pension Funds and Retirement Assets for the Future
Varying pressure points influence pension values, including inflation, which can erode the real-world purchasing power of your hard-earned savings, and taxation reforms, which can have a dramatic impact.
Both are rather difficult to predict or plan for, which can mean retirement planning and fund management are pivotal, ensuring you have sufficient risk aversion strategies and diversification incorporated into your retirement assets to offer a degree of assurance.
As an example, some recent events, including the abolishment of the Lifetime Allowance, may have affected various aspects of your retirement planning, such as:
- The tax burden associated with an overseas pension transfer, especially if your fund is valued above £1 million. Likewise, if you plan to transfer a UK pension to an EU Recognised Overseas Pension Scheme (ROPS), you will need to factor in the newly abolished exemptions on the Overseas Transfer Tax (OTC), levied at 25%.
- Exposure to income taxation on lump-sum withdrawals and regular pension benefits.
- Tax efficiencies of restructuring pension funds into alternative schemes or different investment products.
Other ongoing reviews and reforms, including the Pensions Review promised by the Chancellor, with an intention to ‘unlock’ investment from defined contribution schemes, the consultation around IHT and pensions, which closes in January 2025, and the anticipated further changes to pension tax reliefs may all have ramifications.
Much remains to be seen, but being proactive about your retirement, ascertaining your current level of savings, and making informed decisions early on may be essential in protecting your pensions and ensuring your retirement is everything you aspire to.
As a final pointer, you can access the Pension Tracing Service if you’re working on your retirement planning. Calculating future pension income may be tricky, but with an estimated 2.8 million unclaimed pension pots worth £26.6 billion that have been forgotten, lost, or transferred to another fund following business closures, you may just find you have another pension to add to your budget.
Should you be unsure whether your retirement savings are sufficient and tax-efficient, wish to start planning now to confirm you have the funds and assets you expect or want to start with a review of your retirement planning with an accomplished wealth manager, we recommend scheduling a convenient time to speak with one of our talented retirement specialists at the Chase Buchanan Wealth Management offices closest to you.
*Information correct as at October 2024