We all know that most of us aren’t saving enough for retirement, and research shows that women are generally saving less than men. There are a number of reasons for this – women tend to earn less than men, and if they take time out of the workplace to bring up children, find it harder to save. But don’t put it off forever.
Saving for retirement — the basics
Follow these basic steps to make sure you don’t miss out on saving for your retirement.
1. Don’t rely on the state pension alone
The basic state pension is currently a fraction over £119.30 a week (in the tax year 2016-17), although you get more from the state if you have paid into SERPS or the state second pension over the years. If you reached state pension age on or after April 6th 2016 you will come under the flat rate state pension regime, which means you could get £155.65 a week (the maximum flat rate).
SAVVY TIP: While the old and new pension systems are introduced you may get less or more than these pension amounts. However, as a broad brush figure, most people are likely to retire on no more than £20 a day by way of a state pension. Not enough for the retirement most of us would like!
2. Don’t put off starting a pension
It’s a bit of a cliché to say that the earlier you start to save, the easier it will be, but I’m afraid it’s the truth.
SAVVY TIP: If you start saving £100 a month at age 25 and continue saving for 40 years, you’d have around £91,000, assuming a rate of return of 3% a year. If you left it until you were 40 before you started saving and saved £200 a month, you’d have around £88,000 (this doesn’t take account of tax relief and assumes you’d pay tax on the whole pension. You can read more about how tax relief works in my article called Tax relief is a pension top up; how does it work?).
3. Save as much as you can for as long as you can
There are bound to be much more important things to spend your money on than a pension. But just think about what you’d live on if you don’t put some money aside.
4. Show an interest in your pension
The idea behind a pension isn’t a complicated one, but the language and some of the rules are. Don’t let this put you off!
SAVVY TIP: Don’t just opt for the ‘default’ pension fund if you’re in an employer’s scheme. It may not be the best fund to be in. Some of them invest a lot of their money in shares (which may or may not be what you want) and others have a distinctly mediocre performance. I’ve written an article called What’s in your pension? Understanding default pension funds, which sets out the basics.
5. Consider joining your employer’s scheme
The reason why it generally makes a huge amount of sense to join your employer’s pension scheme is that they will normally pay into it. At the moment, an employer can set up a pension scheme and not pay into it, but soon they won’t be able to.
SAVVY TIP: A new government initiative called ‘automatic enrolment’, which is being phased in between 2012 and 2018, means all employers will have to offer a pension scheme that they contribute to. As a minimum they will have to pay in roughly 3% of your salary (although they can pay in more). Some employers are much more generous — especially those that run final salary pension schemes.
6. Review your pension regularly
A pension isn’t something you can take out and forget about (sadly!). You’ll get the best from your pension if you read the pension statements so you’ll know how much your pension is worth and could be worth.
SAVVY TIP: Think about paying extra if you can afford it and keep an eye on how your money is invested. As you get nearer to retirement age, you’ll probably want to have less of it invested in shares (which can fall in value quite easily) and more in lower risk investments such as cash and bonds.
7. Get a statement or forecast of your state pension
If you don’t know how much state pension you’re entitled to, you can find out by contacting the Pensions Service by phone or filling in a form online.
SAVVY TIP: I’ve written an article about How to get hold of and understand your state pensions statement, which has more information.
8. Keep your paperwork safe
SAVVY TIP: You should be sent an annual statement about what your pension is worth now and what it could be worth at retirement. It’s useful information and is worth holding onto. You may also have information about your state pension included as part of your statement, depending on the type of pension scheme you’re with.
9. Take professional advice
SAVVY TIP: Talk to an independent financial adviser (IFA) if you’re not sure about your options. If you don’t want to use an IFA, make sure you speak to someone from a service such as the Pensions Advisory Service and/or get as much information as you can from the pensions provider or your employer.
10. Always ask questions
SAVVY TIP: This is a really important one. If you don’t know why you’re being asked to do something — ask. It’s especially important if you are taking out a pension on your own, as opposed to signing up for an employer’s one.
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