Whether you are fresh into your career, or edging closer to receiving your pension. Saving for retirement is a fantastic investment on your future.
Whatever stage you have reached in your life time, the importance of saving for retirement is great. The difference it could make to your life once you reach retirement age is vast.
Retirement is a time to look forward to. Rather than going in to retirement with money worries and financial anxieties, forward planning and saving for retirement is a great way to avert or minimise monetary angsts and enjoy the freedoms that retirement can bring. By giving yourself the amount of financial security you require when reaching the age you decide to stop working, retirement can be a special time filled with actions and activities of your own choosing.
Will my state pension not be enough?
A question often asked of a Financial Adviser, and there is no clear cut yes or no. As of February 2020, the full basic state pension will pay you £168.60 per week. There a few factors which may impact this including your date of birth. You can find out on the GOV.UK website what your state pension should be.
For some people £168.60 or £8,767.20 a year is a perfectly adequate amount. This is very personal to you, your housing situation and lifestyle choices. For others, this amount may not cover their basic essentials, such as rent and utilities. Read our article on Retirement Planning: 8 Step Checklist to a Simple Retirement for more information on calculating how much your will need for retirement.
Other factors which may impact whether you receive the full amount or not include whether you have made the relevant National Insurance contributions. You only qualify for the full amount once you have contributed 35 years’ worth of National Insurance contributions. Additionally, to receive any state pension at all, you must have made a minimum of 10 years’ worth of National Insurance contributions.
Why save in to a pension?
A pension is a financial product. Simply put, a pot of money that you and your employer can pay in to as a way of saving for retirement. A pension however, does come with a certain amount of restrictions. Including being inaccessible (for spending) until you reach 55. This age does not apply to the state pension.
The benefits of a pension include the tax relief. For basic rate tax payers, you receive 20% tax back from the Government, paid directly into your pension. With higher rate taxpayers can claim an additional 20%, and top rate taxpayers can claim and additional 25%. (You must claim for the additional tax relief for higher and top rate taxpayers).
You also receive an increase in pension security. From April 2019, £85,000 per person is fully protected by the FSCS (Financial Services Compensation Scheme) should the investment or pension firm go bust.
Money under the mattress
Misunderstandings or poor management of pensions has given some people a poor opinion of pensions and those people may tell you to put your money under a mattress. A pension product itself is a low risk option for saving for retirement. However, your investment choices and attitude to risk can affect the return you receive from your pension pot.
Should I be saving for retirement elsewhere?
There is no restrictions to limit your savings to a pension product. Although pensions can often be the most lucrative way of saving for retirement, some people do choose to invest their finances elsewhere. From ISAs, Property and Buy-to-let properties.
Options other than pensions:
If you are under the age of 40, a Lifetime ISA is an individual savings account designed for you to save for the future or a first home and can be quite appealing as investments for young people. The Government will add a 25% bonus, up to £1000 per year, with a maximum gain of £33,000 if opened at 18 years old and maximum contributions are made till age 50. Although this seems like a high return, contributing to a pension scheme offers similar in terms of tax relief with returns from interest being higher. With a Lifetime ISA, you are limited as to when your savings are accessible. You must be aged 60 or be prepared to pay a penalty. A pension is available at age 55.
Purchasing your own home is generally thought of as a sound investment, and we echo this thought. The main benefit of owning your own home is that once any mortgage is fully repaid, you are essentially living in a property for free (bar usual utilities and council taxes). Although repaying the mortgage in full can be a significant reduction in your outgoings, it may not always be enough of a saving to live comfortably once you enter retirement and this saving ideally shouldn’t be relied upon to fund retirement.
Purchasing A Buy-to-Let
Purchasing Buy-to-Let properties have seen many investors achieve substantial gains, particularly those who were able to purchase while prices were lower and have seen house prices increase over time. It is important to recognise that although there are potential gains. It is not uncommon for the property market to experience negative changes. Recent trends show London house prices to have reduced (Jan 2020). Consideration must be paid to how soon a property can sell if cash funds are required. Additionally, the upkeep and management costs involved in letting out a property. Lastly, the changes made to tax relief and stamp duty for the property investor.
Although there are alternatives to saving for retirement. The most popular option, and generally the most rewarding is through a traditional pension product. Although contributing to a pension from an early age and building your pension pot over time to give you a better income is greatly emphasised. It is never too late to start planning for retirement and your future.
If you are looking in to pension options, it is always best to seek unbiased pension advice. The Harvest Partnership Ltd are able to support you with setting up a new pension, pension transfers or management of existing pension schemes. All inline with your own attitude to risk.
You can contact The Harvest Partnership Ltd via the Contact Us page.