The State Pension for most people is a lifeline or an additional income once they retire. But most people (myself included) wouldn’t want to be in a position where we have to rely wholly on it when we finally stop working. So when circumstances allow, I’d encourage people to take control of their retirement funding and if you set up a plan and start investing now, the best news of all is that the steps to a richer retirement needn’t incur huge sacrifice.
Time, the amount saved and capital appreciation (that is, growth) are the critical factors affecting how much a person will have in their retirement pot. Put simply if you save for a longer amount of time, put away a greater amount of money and manage to gain a higher rate of return on those savings or investments, you’ll end up with more money in retirement.
Save now
This is the critical thing to do. The more you delay the worse the situation, or the greater the sacrifice, will be to achieve the retirement you want. In the words of Nike – Just Do It. Decide on your plan and then get started. As a practical starting point you can even put cash into a retirement pot until you decide what to do with it so there’s really no excuse.
Open a SIPP
Now think about where to put your money. As this is money for your retirement, then a self-invested personal pension (SIPP) seems like a no brainer. You don’t have to place your pension investing in somebody else’s hands as you would with a traditional pension fund, as a SIPP means you can now decide where to invest for yourself. And depending on the tax rate you pay, the government will top up your contributions within a SIPP. Basically, it’s a tax efficient way to save or invest for retirement. In practice it means that for every £100 a basic rate or non-taxpayer invests into a SIPP, with the government top-up, they’ll have £125 to invest.
Invest in shares
Now this may be the part where not everyone feels comfortable, because investing in shares can seem daunting, but with most providers, a SIPP grants access to a wide pool of investments. Given how shares tend to outperform all other types of investment over a long timeframe I’d recommend investing in them. You can do that either by using a tracker fund which simply tracks, for example, the FTSE 100 and is very easy to set up, or you can opt to set up a personal portfolio. This is more time-intensive, but potentially more rewarding too. And don’t forget, it’s possible to opt for both.
Manage your risk
As a SIPP can’t be accessed until retirement age, there’s an opportunity to develop an extensive portfolio and diversification can help manage the risk. For example, there are shares and funds that give greater exposure to emerging markets, while other companies will make all their sales in the UK. Over time the key is not to lose money and this is why I’d always seek to invest in bigger companies, generally within the FTSE 350 rather than chase companies that could potentially grow very quickly but could also much more easily disappear – along with your investment.