If you want to save for your retirement but you’re self employed or can’t join a workplace pension scheme, what are your options and where should you start?
Planning your pension — tips to get started
Experts say that affordable payments are the key. So here are the main steps you should take:
1. Commit to a regular monthly amount that you can afford without having to stop and start. The regular payments will help spread your risk as the stock market rises and falls as some months you will buy in at a high price and some months at a lower price.
SAVVY TIP: If you work for yourself so cash flow is irregular, you can always pay a much smaller amount into your pension every month and top it up with a one-off payment before the end of the tax year.
2. Keep costs down. Find a pension that has relatively low charges. Charges make a big difference, especially when returns are low.
SAVVY TIP: If you need detailed help, seek the advice from an independent financial adviser but ask for an estimate of how much the advice is likely to cost you upfront. There are an increasing number of firms that will offer one-off advice, or advice online.
3. Once you’ve started you must keep tabs on what you’ve got. Don’t just think it is looking after itself. Legislation and charges change over time and you need to make sure what you’ve got is still right for you
Tony Attubato of the Pensions Advisory Service, which is a free to use not-for-profit advice service on state, company and personal pensions says starting early is a good idea:
4. Start as soon as you can. That way your money will have longer to grow and you’ll have more time to take advantage of the tax breaks the government gives you for paying into a pension plan.
SAVVY TIP: Make sure you won’t need the money before you retire as it will be locked away until you are 55 years old at least (pensions rules say that you can’t access money in your pension until you reach the age of 55).
5. Shop around and compare products. Compare the charges and range of investment choices. Ask for a key facts document — this is a summary of the important facts about the plan.
6. Think about and regularly review your investments. When you pay into a stakeholder or personal pension, your provider will offer a range of investment funds to choose from. With a stakeholder plan, you don’t necessarily have to make a choice because all stakeholder providers must offer a default fund into which savers can pay. There are various types of investments. What suits you will depend upon the level of risk you are prepared to take and how far from retirement you are.
SAVVY TIP: Historically investments that carry the most risk, such as shares, have usually produced the best returns over the long-term. But selecting investments which are described as relatively safe, or less risky, doesn’t mean they have no risk! If you are at all uncertain — get independent financial advice.
Philippa Gee of independent financial advisers Philippa Gee Wealth Management says that you don’t have to use a pension to save for your retirement.
7. Don’t think retirement saving = pension. For some women, putting money into an ISA (individual savings account) is a good idea, particularly if you’re worried about locking the money up until retirement. You can always move money from your ISA into a pension at a later date.
SAVVY TIP: You could also set up your own business or pay off your mortgage and sell your home and downsize. It could all be part of your pension pot.
8. Keep a track of your state pension. It’s surprising what gaps there may be in your National Insurance contributions record. If you reach state pension age on or after April 6th 216, you’ll need 35 years of National Insurance.
9. Look at the balance between charges and investment performance. Just looking at a pension that’s low cost may not be the best approach. You can take advice or research investment funds (via websites such as Trustnet, for example).
SAVVY TIP: Just because a fund has performed well in the past doesn’t mean it will do so in the future. However, it’s worth avoiding funds that have consistently performed badly.
10. Make a plan. It need only take 10 minutes. Work out how much you need to save for retirement and when you might be able to afford to retire by using an online pension saving calculator. This is far more constructive than simply throwing a random sum of money into a retirement pot every month.
12. Where your money is invested matters. So-called “default funds’ are designed to cause the minimum amount of harm to the maximum number of people but they are generally not the most effective strategy for you as an individual. Invest in high risk funds when you are young, such as global equity and emerging market funds; most investors are too cautious, even when they are 30 or more years away from retirement.
SAVVY TIP: Doing anything is generally better than doing nothing. The cost of delay is huge; delaying starting a pension for around seven years will have the effect of halving the income you get in retirement.
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