You may not have noticed that today is Pensions Awareness Day. It’s an admirable campaign, designed to alert the nation to the fact that we’re not saving enough for retirement, and prevent us from sleepwalking into pension poverty.
As part of the campaign, double-decker buses are touring the country dispensing advice. I don’t have a bus, but I do have a few basic pension facts that you really need to be aware of today.
1. The basic state pension is worth just £8,546 a year, and then only if you qualify for the full amount. This works out at £23 a day. Nobody wants to live on that if they can avoid it.
2. If you are offered a company pension with employer contributions, snap it up. Resist all temptation to opt out, because if you do so you are turning down free money.
3. Your employer may pay even more money into your pension if you increase the amount you are investing or use salary sacrifice, where you give up part of your salary in exchange for pension contributions. This can save both you and your employer tax too.
4. A little 1% can make a big difference. A 30-year-old earning £30,000 who paid an extra 1% of salary into a personal pension would have an additional £58,273 by age 68. An extra 2% would give them a £116,546 boost, according to figures from Fidelity.
5. The earlier you start saving, the better. At age 20 you need to invest £125 a month to generate a pot of £250,000 at age 65, assuming investment growth of 6% a year after charges. By age 50, that has risen to a hefty £888 a month, figures from Chase de Vere show.
6. Tax relief is your friend. HM Revenue & Customs gives basic rate taxpayers 20% tax relief on pension contributions, which means each £100 actually costs you just £80. If you’re a 40% taxpayer you can claim extra relief through your tax return, so your contribution costs just £60 (or £55 for 45% rate taxpayers). This makes pension saving a lot less onerous.
7. The best way to save for the long-term is through the stock market. Cash does not cut it. If you had put £10,000 in the average savings account 10 years ago it would be worth just £8,256 today after inflation, but £24,002 if invested in the FTSE All-Share, Fidelity calculates.
8. You can invest up to £20,000 a year through a stocks and shares ISA without paying any income tax or capital gains tax on your returns. If aged between 18 and 39, contributions to a Lifetime ISA attract a 25% Government bonus worth up to £1,000 a year.
9. Performance matters. If you invest £100 a month at 25 and your funds grow at 2% a year, you will have £73,566 by age 65 after charges. If it grows at 8% you will have a whopping £351,428, Chase de Vere reckons. So keep a careful eye on how your portfolio is performing.
10. High charges are a killer. A 30-year-old whose £100 a month grew at 7% a year would have £229,599 at 65 with annual pension charges of just 0.5%. Charges of 2% would reduce this to £153,238. That means £76,361 goes to your pension company rather than your retirement.
So don’t hang around, start building your pension savings now.