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‘I'm mortgage free but have no pension – can I afford to retire?’

Your Money - Money Makeover. Toby Smith, of Finstall, Worcestershire. - Andrew Fox
Your Money - Money Makeover. Toby Smith, of Finstall, Worcestershire. - Andrew Fox

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Three weeks ago Toby Smith, from Bromsgrove, Worcestershire, finally paid off his mortgage.

But despite reaching this milestone, he still worries for his financial future.

Partly because he joined on a short-term contract, Mr Smith, who has worked as a scientist for the civil service for the past 22 years, never joined his employer’s pension scheme.

Now, at age 56, he finds himself with just £10,000 in savings and nothing else put away for later life. “I am kicking myself for focusing too much on paying the mortgage off early rather than saving for my retirement,” he said.

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Mr Smith’s partner has kindly agreed to pay the bills so he can focus on building up as big a retirement pot as possible before he stops working.

He currently earns £50,000 a year and estimates he can save between £1,200 and £1,500 a month.

However, this could drop when he reduces his working week in five years’ time. A self-confessed animal lover, Mr Smith hopes to work three days a week, down from four, so he can spend more time pursuing his true passion and volunteering for an animal charity. However, this will mean taking a 25pc pay cut.

“I want to save as much as I can – but I don’t want to work until I drop,” he said.

With the aim of fully retiring in 10 years, Mr Smith wants to know if he should join his pension scheme immediately or if he would be better off saving elsewhere.

Your Money - Money Makeover. Toby Smith, of Finstall, Worcestershire. - Andrew Fox
Your Money - Money Makeover. Toby Smith, of Finstall, Worcestershire. - Andrew Fox

James Jones-Tinsley, Self-Invested Pensions Technical Specialist, Barnett Waddingham

Although Mr Smith is not accruing a pension fund in the traditional sense, if he amasses at least 35 years' National Insurance payments over his working lifetime, then he is entitled to receive the full state pension from state pension age, which in his case is 67.

I suggest he applies for a free state pension forecast from the Department for Work and Pensions to check any gaps in his NIC record. If there are, and he is able to afford it, he has until the end of July 2023 to “plug the gaps”.

The next piece of good news is that Mr Smith is now contractually entitled to join his employer’s pension scheme. Happily, this is the Civil Service Pension Scheme – one of the most generous in the country.

Like the state pension, this scheme will provide him with an inflation-proofed retirement income for the rest of his life. As well as generous tax breaks which apply to pensions, he will also benefit from ongoing contributions into the scheme from his employer. This comes on top of immediate relief on his contributions, which are deducted from salary before the remainder is subject to income tax and NICs.

Following the Budget this week, the amount that savers and employers can contribute to a pension each year – the annual Allowance – is rising from April to £60,000, up from £40,000 today.

Mr Smith holds £10,000 in emergency savings, with his partner offering to pay all household bills. It is good practice to have a sum of readily available cash always to hand, just in case something unexpected happens, which requires expenditure to sort.

However, following recent increases in inflation, it is important to maximise the interest rate on these emergency savings. There are several financial institutions currently offering easy-access savings accounts with a variable rate of more than 3pc per year.

Rob Burgeman, investment manager, RBC Brewin Dolphin

Mr Smith should almost certainly join his employer's pension scheme. Assuming that his employer makes contributions, this is, essentially, free money that it would be foolish to turn down. Plus his own contributions will receive tax relief at his marginal rate.

At earnings of £50,000 he is – just – a basic rate taxpayer. But even so, this means in effect that his pension contribution of 80p is immediately £1.

Regular saving to build up a pot over the next ten years or so is also an excellent idea. Saving £1,500 per month for five years, and then reducing this by 25pc for the next five years (when he steps back from work) and achieving, say, a 5pc return on his investments could see him build a pot of £211,614 by the end of year 10. However, only saving £1,200 reduces this pot to £169,291 – quite a difference.

Not dropping to a three day week in year five can also change the sums markedly. At £1,500 per month, the pot might grow to £237,722 and, for £1,200 per month, to £190,178 under the same timeframe.

Something else to consider might be paying these into a pension. While he will lose the ability to flexibly access the money as and when he wants without worrying about tax considerations, saving £1,500 into a self-managed pension could be worth £1,875 after basic rate tax relief, increasing his final pot value to £264,517.

It is important to remember that investment is a marathon, not a sprint. Mr Smith should not be tempted to go for an ultra-high-risk strategy to try to capture the returns he could have had over the last thirty years.

Instead, he should aim for a balanced approach, creating a portfolio with a mixture of bonds, shares and alternatives which should smooth the returns over time.

For now, the right kind of allocation should be 70pc stocks, 15pc bonds and 15pc alternatives, but as he approaches retirement, he should probably consider reducing the risk. At least annually, he should rebalance, too, otherwise he might quickly find that the overall portfolio has too high an equity content and become more volatile.

In terms of the investments, he should consider the Fidelity Index World Fund.  This is a very conventional fund that aims to track the performance of the MSCI World Index at a very low cost of just 0.12pc. This is the fund that will do the “heavy lifting” in delivering long-term capital growth, albeit with some volatility.

With this, he could hold the Vanguard Global Aggregate Bond ETF GBP Hedged.  This is a mixture of government and corporate bonds – essentially loans to countries and big companies – with returns hedged in sterling to reduce currency volatility.  The fund charges just 0.1pc and should provide ballast to the portfolio, albeit with lower returns.

Finally, the JP Morgan Global Macro Opportunities Fund aims to deliver positive investment returns in most market conditions and invests in currencies, commodities and other assets. It is available at 0.6pc and, again, provides balance and returns which are not correlated with the other two funds.

Overall, then, Mr Smith's situation is not without hope. Ten years' of employer pension, some savings, a state pension at 67, plus his own home unencumbered with a mortgage all have the potential to give him a decent retirement.