Finance for Singles 4 – Planning for Retirement
In the final blog post of financial advice for single people, we’ll look at being prepared for retirement, and what to do to protect yourself if you can’t make decisions for yourself.
Planning for retirement
You may think it’s a bit of leap from emergency funds to retiring, but you’ve only got one salary to fund your future rather than two, so you need to get serious as early as possible. A truism in personal finance is that the earlier you start, the richer you’ll be one day – it’s simple compounding maths.
If you’re saving towards your pension for forty years, the money you put away in the first ten years will be over half of what you end up with one day, simply because it’s had longer to compound.
If you can put £50 a month into your pension, start doing it now. Commit to increasing it a little bit each year too. Those small increments add up to massive changes over time.
Remember, your retirement income needs (the amount you need paying out from your pension, savings and investments) are not going to be half of what a couple’s are, they're more likely to be 60 to 70% of that, because housing costs will be the same, although you’ll pay less for food and fuel.
It’s also more important, particularly if you’re single, to take advantage of the freebies which are on offer from the government.
Pension tax relief is available to everyone, single or not, but it’s free money, so suck it up! HRMC adds £20 to every £80 you put into a pension (that’s 20% tax relief) if you’re a basic rate taxpayer. If you’re a higher rate taxpayer, you will receive another £20 back off your tax bill, making 40% tax relief altogether. This tax relief applies up to a maximum contribution of 100% of your income or £40,000, whichever is lower.
You’re going to have to work harder than two people who are working towards the same goal, so I’d suggest a stakeholder pension because these are usually the cheapest, ‘Tesco Value’ style, just to get you started with saving.
If your employer has a pension scheme, then join it and contribute as much as you can. They may match your contribution up to a certain amount, so put in as much as you can to make sure you maximise that match.
Take all the free money you can get, from the state or your boss. You won’t be able to touch your pension until you’re 55, and that’s rising to age 57 from 2028, so make sure you’ve got funds you can get at immediately as well. The earlier you start your pension, the better.
What if you can’t make your own decisions?
An essential part of your financial planning you need to make a will and arrange a Power of Attorney.
Thinking first about a will, just because you’re not around anymore, doesn’t mean that people know instinctively what you want to happen, and it’s probably less obvious when you don’t have dependents to leave money to. If you want money to go to charity or to siblings, you will need to make that clear in a will.
Possibly more important, although I hesitate to say it, is a Power of Attorney. If anything happens to you so you can’t make decisions for yourself, you’ll be dependent on a court to make them for you, unless you put into place a Lasting Power of Attorney.
An LPA comes in two forms – one is Health and Welfare, and the other is Property and Financial. As the names suggest, the first gives someone you trust to make decisions on your healthcare needs. The latter gives them power to make decisions about financial matters.
Most people have both, but not always. Think about someone you trust, and if you don’t have any family at all, you could name a professional attorney – a solicitor – who can act on your behalf to make decisions if you’re unable to do so. Needless to say, you should choose your attorney wisely.
The document doesn’t become live straight away, so you’re not giving away your control as soon as it’s written. It simply remains ready until, heaven forbid, you become incapacitated by accident or you’re unable to act on your own behalf.
Financial planning for singles
Let’s recap: Get the protection in place: income protection first, then critical illness, then life insurance.
Build an emergency fund, and place a buffer between you and the world by having three to six months or more of net income in an account that you can access easily.
Start planning for retirement now, even if it’s 40 years off. The earlier you start, the better off you’ll be. It’s entirely down to you, so take advantage of the freebies, tax relief, contribution matching from your boss and so on.
Then, make a will and put a Lasting Power of Attorney in place in case you’re unable to make decisions for yourself – whoever you choose, it must be someone you trust to act in your best interest.
It’s up to you
If you’re single, you have to grab your own future by both hands. You know this is important, and you’re motivated to do just that, because nobody else will do it for you.
Make the decision to get serious. Start with a monthly budget, and make sure you’re putting money aside each month, without fail, to prepare for your future. Spend less than you earn, pay yourself first and you’re on your way.