I don’t know about you, but I don’t fancy scraping by on £23 a day for the rest of my life. That is what the State Pension is worth, which is why you also need retirement savings in your own name. Here’s how to build them.
Free money!
Those with a company pension have a head start. Employers are obliged to make contributions and you get tax relief too so please, don’t opt out. If you do, you are turning down free money, that you will desperately need later. Your golden years won’t seem so shiny if you are counting every single copper.
Don’t leave it at that, though. The more you can save, the merrier. Consider investing in a personal pension as well, and again, you get an incentive, in the shape of tax relief. For every £100 of pension contribution, a basic rate 20% taxpayer only has to pay £80, while a higher rate 40% taxpayer effectively pays in just £60. Again, we are talking free money here.
Take a SIPP
A host of online investment platforms offer flexible self-invested personal pensions (SIPPs), which allow you to invest in a massive range of shares, bonds and other asset classes. AJ Bell, Bestinvest, Fidelity, Hargreaves Lansdown, Interactive Investor and The Share Centre are just some of the companies offering them.
Understandably, many people prefer stocks and shares ISAs, which are simple to understand and more heavily promoted. They also offer generous tax breaks, but on the way out, rather than the way in. So no upfront tax relief on your contributions but instead you can take all your income and capital gains free of tax.
Once in a Lifetime Isa
Pensions and ISAs therefore make the perfect tax-friendly combination, a blend of the two can keep your future tax bills to a minimum. And if you are aged between 18 and 39 you can get yet another government tax break, a 25% top-up worth up to £1,000 a year through a Lifetime ISA.
You can invest up to £20,000 in a stocks and shares ISA this tax year, although most people won’t have that much cash to spare. However, you can start from just a few pounds, and doing something is better than nothing.
Shares thrash cash
Again, there is a wide choice of ISA providers, including the names listed above, and others including Cavendish Online, Chelsea Financial Services and Wealthify. Too many people leave money idling in a cash ISA earning 1% or less, but with inflation at 2.7%, your money will actually fall in value in the longer run.
That’s why you have to go for stocks and shares. Yes, they are more volatile, but over long periods such as 10, 20 or 30 years, which is the length of time you should be saving for retirement, they should deliver a vastly superior return.
A fit state
For example, if you had invested £20,000 into the FTSE All Share index 10 years ago you would now have £41,100, against just £20,420 in the average savings account, Fidelity calculates. The longer you invest, the greater the outperformance. And the less you have to worry about the State Pension.