When it comes to planning for your future, and more specifically your retirement, a pension could be the best way to ensure you hang up your boots with a comfortable nest egg to boot.
Pensions come in many flavours (defined benefit, defined contribution, personal pensions, SIPPs, to name a few) and it can get a little overwhelming if you don’t know what you’re looking for, or how to go about kick-starting your savings.
But that’s no reason to bury your head in the sand — your retirement isn’t going to plan itself. And every day you delay could cost you dearly.
So, if you aren’t currently saving into a pension plan, or you don’t really see what all the fuss is about, this blog aims to help.
1. It’s never too early to start saving…but it could be too late
Thanks to that wonderful thing called ‘compound interest’, the sooner you start saving, the greater your overall pension pot and, subsequently, the greater your year-on-year returns.
Let’s say you’re targeting a pension pot of £10,000 a year during your retirement. If you start to save for your pension at 35, you’d have to contribute around £4,300 to your pension every year until you retire. But if you start at 50? You’re looking at £13,000 each year (ignoring for a second that this may be far less than you may need to fund the lifestyle you actually want).
And that’s not taking into consideration the cost of inflation — the true figure is likely to be much more.
Pensions aren’t typically top of mind when you’re in your twenties or thirties — retirement might seem like a lifetime away. But for every year you push your pension planning further down your list of to-dos, you’re leaving yourself with more catching up to do later on — precisely when you might have even more outgoings thanks to a growing family and sizeable mortgage.
There’s no such thing as too early. Unfortunately, there is such a thing as too late.
2. Tax relief
While you could keep your money tucked away in a regular savings account, it’s not going to do you any favours in the long run. Pensions come with attractive tax reliefs that make sure your money is working as hard as it can over your career.
Basic rate taxpayers will get 20% tax relief on anything contributed to a pension scheme, higher-rate taxpayers will get 40%, and for top-rate taxpayers, it’s 45%.
What does that mean exactly? Well, as a basic rate taxpayer, if you contribute £100 to your pension pot, it would only cost you £80 in reality. The £20 that would have been taken as tax is added back into your pension savings by the government instead. (For higher-rate taxpayers, it would take £60 in contributions to make up £100 in pension savings, and for top-rate taxpayers, it would take £55).
The annual tax-free allowance for all pension plans is £40,000 (gross) or up to 100% of your salary, whichever is greater. And the total amount anyone can contribute to their pension, tax-free, over their working career is £1.055m (this is called the ‘life-time allowance‘).
Tax relief on pension schemes is a huge incentive to save. If you have to rely on the state pension alone (up to £168.60 per week/£8,767.20 annually) it isn’t going to get you very far…
3. You might need more than you think
43% of the public don’t know how much they’ll need to retire comfortably. Not to burst any bubbles, but it’s usually much more than you think.
Although half of us estimate that £100,000 is enough to have a comfortable retirement, according to recent reports, the average recommended amount is actually £260,000–£445,000. (And remember — ‘comfortable’ is entirely subjective.)
Think about what it would take to sustain the lifestyle you’re used to at the moment, or make it better. Most people look forward to their retirement because they imagine an improved quality of life, not one where they have to account for every penny spent.
So the big question to ask yourself is “what am I saving for?”
Do you want to send your kids to university or help them get a foot on the property ladder? Do you or another relative need support to pay for medical or long-term care? Or do you want to enjoy what you’ve earned and splurge a little? (after all, you’ve earned it).
Determining the big events in you and your family’s future, and what it is that you’re saving for, will help you better plan how to get there, and how much you’re going to need along the way.
Those that fly blind when it comes to how much they’re saving, or who don’t save at all, could end up living a retirement lifestyle that’s very different to the one they’ve dreamt about.
4. Employer contributions
The good news for UK workers is that as of 1 February 2018, every employer with at least one employee is now legally obliged to enrol all eligible members of staff into a workplace pension scheme.
Automatic enrolment applies to anyone working in the UK aged between 22 and the State Pension age, who earns at least £10,000 a year.
For the 2019/20 tax year, the minimum auto-enrolment contribution for workplace pensions has risen from 5% to 8%, and within that, employer contributions have gone up from 2% to 3%.
This is another significant advantage of saving into a (workplace) pension — your employer is helping to build up your pot at no expense. If you have the chance to contribute to a workplace pension — take it!
5. Turn your retirement dream into your retirement reality
Everyone has their own idea of what retirement looks like — it’s as personal as it gets.
Whether it’s spending more time with loved ones, going on that once-in-a-lifetime holiday, buying a property by the beach that you’ve always dreamt about, or filling your time doing more of the hobbies you’ve neglected, your retirement should be something you look forward to. And after decades spent working hard, why shouldn’t you get to live it the way you’ve always imagined?
The problem is, while it’s easy to dream about the lifestyle we might want, it’s much harder to make it a reality.
But by making smart financial decisions today, including saving into a pension, you’re setting yourself up to reap the rewards when you finally reach that all-important milestone.
If you aren’t already saving into a pension — there’s no time like the present.
Richard Wazacz is CEO of financial advice firm Octopus Wealth.
Octopus Wealth is home to a fast-growing team of highly experienced financial planners.
With a jargon-free, transparent and straightforward approach, they provide smart financial advice and tailored financial planning for those who want to do more with their money.