With bills to pay, it’s remarkably easy to forget about saving for retirement. This becomes even easier when there’s a pandemic in town. Even in more normal times, a lot of people don’t begin setting some money aside until later in life. Some don’t save anything at all.
This is a big problem for anyone expecting a certain lifestyle in their golden years. After all, the new State Pension pays out just £175.30 per week, or £9115.60 per year.
The good news, however, is it’s never too late to begin. Here’s what to do.
How to get saving for retirement
The best way of saving for your retirement is via a pension. If you’re not currently enrolled in your employer’s scheme (many people will be, thanks to auto-enrollment), you need to get involved as soon as possible. The great thing about a workplace pension is that your employer also makes contributions, helping your pot to grow faster.
Now, doing the above will get you started. But it still might not be enough to give you the life that you want. Moreover, those who are self-employed won’t be able to take advantage, meaning they’ll definitely need to take the bull by the horns (albeit perhaps after consulting a financial advisor).Â
Get a SIPP
Opening a Self-Invested Personal Pension (SIPP) is something everyone with one eye on retirement should consider. Unlike its workplace equivalent, this account puts you in full control of your savings. This, of course, isn’t the only benefit.
Like the Stocks and Shares ISA, the SIPP allows you to avoid paying any capital gains tax on the profits you make from your investments. Dividends aren’t taxed either. The only snag is that SIPP holders will need to pay tax when they start withdrawing their money.Â
But there’s more. Any contributions made to a SIPP qualify for tax relief at your normal rate. So, a basic rate taxpayer (20%) depositing £200 into their account, for example, will receive an extra £50 to invest from the government. This is patently a good thing since the more you have to invest, the more you can take advantage of compound growth.
Another advantage of the SIPP is that you can contribute up to £40,000 per year — the maximum ISA contribution. This being the case, a SIPP could theoretically get you to your financial goals a little sooner. That’s handy for someone building a retirement nest egg from scratch.
What next?
Having opened a SIPP, the account holder needs to decide what to fill it with. This will depend on a number of factors, particularly their age and risk tolerance.
Younger SIPP holders may want to gravitate toward riskier investments like growth and/or small-cap stocks. After all, they have many years to go before needing to access their funds and can endure some volatility. Older investors, while still having exposure to equities through funds, may want to introduce traditionally less risky assets, like bonds, into their portfolios.
Regardless of your strategy, the numbers can be truly impressive. Someone who’s able to put £200 (or £250 after tax relief) to work every month for, say, 30 years will reap massive rewards. Ignoring costs, a not-unreasonable annual return of 8% would give £340,000!
Don’t delay — get a savings plan together. In a few years, or decades, you’ll be glad you did.