With the state retirement age recently being pushed back again, and with current pensioners “enjoying” a maximum of £160 a week in state pension benefits, saving for retirement isn’t something you should be putting off.
It’s a youngster’s game…
According to figures from insurance company Standard Life, a male who starts saving at age 30 can get a pension of £10,000 a year at age 68 by saving £149 a month. A lot of people fall into the trap of thinking “that’s a lot, I’ll wait until I’m earning a bit more”. Nice idea, but there’s a nasty sting in the tail.
If our male waits until aged 40 he would have to put by £290 a month to receive the same £10,000 at state retirement age. Ouch.
Ideally, you should be (or should have been?) in your 20s when you start your retirement savings. In fact, as soon as you get your first “proper job” is the best time to start.
How to save
The two best ways to save involve keeping your money away from the taxman as much as possible – these are currently using a pension plan, or an ISA.
Pensions offer tax relief on the money you pay in as well as your returns, and come in two forms: workplace and personal.
A workplace pension – also known as an occupational or company pension scheme – is a way of saving for your retirement that’s arranged by your employer.
And under recently introduced rules, all employees aged between 22 and the state pension age who earn more than £10,000 a year should be offered one, although it’s not compulsory that they actually join a scheme (although we think there’s a strong argument that it should be).
The big advantage of pensions like this is that your employer puts money into your fund as well as you, with most companies paying in somewhere between 3% and 10% of your pay each month.
Ideally, your total pension contributions should top this up to around 15% of your salary. That sounds a lot to most people, but you need to be aiming to get as close to this as possible if you want a decent standard of living in retirement.
You do not have to limit yourself to your workplace scheme. Many people also take out a personal pension, where they pay regular amounts or one-off lump sums to a pension provider (often an insurance company) that invests the money.
The amount you pay into your personal pension can be changed as your income changes throughout your working life, and the insurance company will often give you a large range of investment funds to choose from. This usually means more investment freedom than a company pension scheme, although of course there’s no employer contribution.
Cash ISAs (“Individual Savings Accounts”) differ from a normal bank savings account in that they don’t attract any tax on the interest you earn up to a yearly limit.
If you’re lucky enough to be a higher-rate taxpayer this means avoiding income tax at 40% on any savings interest, for everyone else it’s a saving of 20%.
You can also invest in the stock market using an ISA. These stocks and shares ISAs are free from both income tax and capital gains tax, which can be up to 28% if you make a gains of more than the annual allowance of £11,300.
You can transfer money invested either this year or in previous tax years between both cash and stocks and shares ISAs without losing the tax-free status – as long as you don’t physically take the money out. In the 2017/18 tax year you can shelter up to £20,000 from tax in an ISA.