If you’ve reached the age of 50 and have not saved much for retirement, then the good news is that it’s not too late to turn things around.
In this article, I’m going to share some simple tips that could give a big boost to the value of your pension. I’ll also suggest a simple stock market strategy that should help you build up your savings.
Free money #1
If you’re in employment and have a workplace pension, then you have a potential source of free money. There are two reasons for this.
Your employer may offer matching pension contributions up to a certain percentage of your salary – perhaps 10%. I reckon it makes sense to take full advantage of this. It’s basically the same as getting a 10% pay rise each year, deferred until you retire.Â
The second reason to pay into a workplace pension is that pension contributions get tax relief. Up to certain limits, you will not pay income tax on earnings paid into your pension. Just like the employer contributions, this is free money. Why say no?
Free money #2
If you’ve moved jobs a lot, you may have ‘orphan’ pensions with previous employers.
This is a situation I’ve been in myself. The good news is that it’s still your money and you should be able to take control of it again, with a little detective work.
What I did was to transfer my small pension funds from two previous employers into a low cost Self-Invested Personal Pension (SIPP). This enabled me to group all my pension cash together and manage my own investments.
A word of warning: before you decide to transfer any old pensions, it’s important to make sure that you aren’t losing any extra benefits they provide. These might include guaranteed payments or income for your spouse after your death. If in doubt, I’d suggest taking professional advice.
Cash to invest? Here’s what I’d do
If you’ve moved money into a SIPP you’ll need to invest it somewhere, as returns on cash are almost non-existent.
Similarly, if you’re able to save some extra cash each month, I’d suggest putting it into the stock market as long as you don’t expect to spend it for at least five years (preferably longer).
How should you invest this cash? Unless you’re already an experienced investor with a track record of beating the market, I would suggest putting your cash into two simple index tracker funds.
I’d put half my cash into a cheap FTSE 100 tracker fund, choosing accumulation units so that dividends are automatically reinvested.
However, the FTSE 100 is great for income, but not so good for growth. So I’d put the other half of my cash into a FTSE 250 tracker fund.
The mid-cap FTSE 250 has risen by 28% over the last five years, compared to less than 10% for the FTSE 100.
I think that splitting your cash between these two indices should provide a mix of growth, income, and stability, with low costs.
Even if you’re interested in picking individual stocks, I think this FTSE 100-FTSE 250 split should provide a good foundation for your retirement fund.