Saving for retirement
It’s up to you to build up a retirement savings pot. Saving for retirement is essential if you want the financial freedom to enjoy your later years.
The State Pension is worth a maximum of £159.55 a week in the 2017/2018 tax year.
This is highly unlikely to provide the income you need to maintain a comfortable standard of living once you have stopped working.
It’s therefore up to you to build up a retirement savings pot throughout your working life.
Things to consider include how much you are likely to need to live on in your later years, how long you have to save that amount and what sort of investment vehicles or accounts you should use to achieve your goal.
When should I start saving for retirement?
Ideally, you should start putting money away for your retirement in your 20s – or as soon as your start earning. Start later and you will have to save a lot more each month to reach the same level of retirement pot.
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, according to figures from Standard Life. But if he waits until aged 40 he would have to put by £290 a month to receive the same retirement income.
How should I save for retirement?
Pension funds – tax-efficient savings vehicles with which you can only access the money at 55 or above – are the most popular way to save for retirement.
However, many people also use Individual Savings Accounts (ISAs), which are a more flexible way of saving.
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 pensions – 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.
The big advantage of pensions of this kind is that your employer contributes to the fund as well as you, with most companies paying in between 3% and 10% of your annual salary each year.
Ideally, your total pension contributions should top this up to around 15% of your salary to ensure you have enough saved up by the time you retire. You do not have to limit yourself to your workplace scheme, however. Many people also take out a personal pension, with which you pay regular monthly amounts or a lump sum to a pension provider that invests the money on your behalf.
Personal pension payments can be altered as your income changes throughout your working life, while the provider will usually offer a range of investment funds – giving you greater investment freedom than with a typical workplace scheme.
A Self-invested personal pension (Sipp) offers the widest investment choice. But whatever type of personal pension you choose, it is vital to shop around and compare both charges and investment performance. It is also worth noting that you can currently benefit from tax relief on the first £40,000.
Cash ISAs, differ from standard savings accounts in that they do not charge tax on the interest you earn – up to an annual limit. For higher-rate taxpayers, this means avoiding income tax at 40% on any savings interest, while for savers in the basic-rate tax band it provides a saving of 20%.
Stocks and shares ISAs, meanwhile, are free from both income tax and capital gains tax (CGT), which can be charged at up to 28% if you make a gain of more than the annual CGT 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 do not physically withdraw the money.
There are also innovative finance ISAs, introduced in April 2016, which invest in peer-to-peer lending. Returns from this type of ISA are also tax-free.
You can shelter up to £20,000 from tax in an ISA in the 2017/2018 tax year, either in cash or in stocks and shares or an innovative finance ISA.