A guide to starting a retirement savings plan
There are plenty of ways to save money and a range of products to choose from to kick start your retirement savings plan.
You could open an ISA, for example, or invest in property as a way of saving for your retirement. But there are some very clear benefits of saving into a pension.
There’s a famous investing mantra, derived from a Chinese proverb, which says:
“The best time to start investing was 20 years ago. The second-best time to start investing is now.”
It may sound obvious, but with one in seven British adults retiring last year without a pension, and women more than three times as likely as men to retire without a pension, it’s something that is a very real issue that needs to be addressed. But how much should you save?
How much do I need to save in a pension each month?
Saving a portion of your income into a pension each month is a great way of getting into the habit of saving money, and it will help you build towards a comfortable retirement.
According to Hargreaves Lansdown, there's a very rough rule of thumb to follow in order to find the ‘magic number’ for a comfortable retirement.
- Take the age you start saving into your pension and divide by two.
- Then put this percentage of your pre-tax salary aside each year until you retire. Don’t forget to include your employer’s contribution in that percentage.
So if you're starting a pension at 30 years old, you should be aiming to save 15% of your earnings each year to retire at 65. If you’re aiming to retire earlier, you'll need to save more. Either way, the earlier you start to save, the larger pension fund you will be able to draw on in your retirement.
The success of incremental saving increases the earlier you start
Although you may not be able to save at the above levels in your 30s, it’s important to kick start your retirement pot with what you can afford. That way you won’t have to start saving from scratch in your 40s and 50s.
Saving £375 a month in your 30s is perhaps more palatable than having to find over £1,000 a month if you leave your retirement saving until later in life.
On the other hand, your monthly income should rise as you move through the decades and if you are in a company pension scheme, your employer will be contributing some towards your target amount. In addition, the more you contribute, the more the government gives you in tax relief.
The above calculations don’t take into account the benefit of compounding, which allows you to earn more money on the amount you invest, providing you reinvest the earnings on that money.
Retirement planning calculator
How much will you need?
Which? surveyed more than 2,749 retired and semi-retired members about their spending in February 2017.
On average, retired couples found £18,000 a year covered the household’s essentials – food, utilities, transport and housing – and £26,000 allowed for extras, such as European holidays.
With £39,000 a year, they stretched to long-haul trips and a new car every five years.
Those calculations from Which? include what you’ll get from the state pension and the remainder made up by taking out money each year from an income drawdown plan to get your annual income to £26,000 or £39,000.
To work out how much income you will need for your retirement, you’ll need to forecast what will be in your pension pot and forecast your living costs in order to find out the shortfall.
- Check how much is in your pension pot.
- Add your State Pension to the amount in your pension pot.
- Consider any other income you may have in retirement.
- Deduct the tax you’ll need to pay.
- Estimate the living costs you are likely to have.
- If there’s a shortfall between what you’ll have and what you need, now is the best time to kick start your plan.
Don’t forget you’re not on your own.
Tax relief: HMRC adds money to your pension pot too, in the form of tax relief.
- You usually get 20% tax relief as standard and then if you’re a higher rate tax payer you can claim another 20% through your tax return, rising to 25% for those who pay the top rate of tax.
- For example, if you’re a basic rate tax payer and you pay £8,000 into your pension fund, HMRC effectively adds another £2,000, giving you a £10,000 total.
- You currently get this tax relief up to a limit of £40,000 per year or 100% of your salary (whichever is lower).
Employer contributions: Take any available funds from your employer - this sounds obvious, but many people overlook this benefit in order to retain fleeting discretionary income.
If you’re saving into a workplace pension, auto-enrolment rules mean that your employer usually has to contribute too. The minimum employee contribution is currently set at 1% of your ‘qualifying earnings’ (including tax relief), with at least 1% contributed by your employer, although these amounts are set to rise over the next few years.
- Some employers also offer ‘contribution matching’, which means that if you increase your pension contributions they will increase the amount they add.
Self-employed: If you’re self-employed, investigate retirement saving options - for most people the State Pension will not cover your retirement needs.
So now you have an idea of what you need, where do you start? There are some great investment opportunities available to help you target a financially healthy retirement.
Retirement Investment Ideas
Traditional pensions are a thing of the past. With the pension reforms, investors have more choice as to how to invest for their retirement. When you decide to start saving, the two main options are contributing to a pension or opening an ISA.
Pensions are the most popular, and while you can contribute to them as soon as you start earning, you won’t be able to access the money until you reach the age of 55 – this makes it a good way to secure funds for your retirement.
ISAs are a more flexible way to put a retirement pot together as, depending on the ISA product you choose, you may be able to access the money before you retire.
Saving for retirement: ISAs
ISAs offer a tax-free way to save, and you can invest up to £20,000 in the current 2018/19 tax year. There are several different types of ISA.
- You can choose to pay in to a cash ISA, for example, and opt for either an easy access ISA where you can access you funds whenever you need to, or a fixed rate ISA where you tie up your funds for a set time.
- You could consider investing in a stocks and shares ISA – but be aware this is an investment and the value of your investment and the income derived from it can go up as well as down - you may get back less than you originally invested.
- Alternatively, you could think about a Lifetime ISA which is a type of ISA that enables you to build up a long-term fund, generally for buying your first home or for retirement. You can pay in up to £4,000 a year, and the government will contribute 25% of what you’ve paid into the account too
A personal pension can be a good way of spreading your investment, as you can often split your money across a range of asset categories like shares, bonds and cash. Diversifying your investments is a prudent way of managing risk. Most pension plans provide an affordable way of accessing a professionally-managed, diversified investment portfolio. Investing time in your research will be worth it to find the right pension plan for you.
As with any investment, the performance of your pension investments should be reviewed on an ongoing basis.
If you want even more control over your investment you can opt for a self-invested personal pension (SIPP).
SIPP and SSAS plans
A Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) are alternative retirement investment plans that allow you to access returns for a wide range of assets, such as direct lending and property. This approach could make a real difference to your retirement funds.
Investors who are looking to take back some control, or at least gain visibility of their pension, have found SIPP plans an appropriate solution. Self-Invested Personal Pensions can offer:
- Control to make your own investment decisions
- Growth free of UK capital gains and income taxes in some cases
- Investment across a wide spectrum of investment opportunities
- The option to change your SIPP plan to suit your circumstances
A SIPP is up by a specialist provider and is open to anyone and doesn’t require a sponsoring employer. SIPP pension plans are popular and demand is increasing. In fact an estimated one million people in the UK have a SIPP pension plan.
A SSAS is an occupational pension scheme, and requires a sponsoring employer. A growing number of company owners are using SSAS schemes to take advantage of the fact that businesses can borrow from pension assets. Other advantages include increased flexibility on where the assets can be invested and advantages when it comes to tax planning. Small companies often set up SSAS schemes because they can open it up to all employees and their family members.
SIPP and SSAS schemes each have advantages and disadvantages which need to be considered before choosing the right retirement scheme to suit you.
If you’re new to the world of SIPPs, then there are a few things to consider so that you can decide if it’s the right choice for you. The BondMason Guide to Self-Invested Personal Pensions provides an overview of the benefits of a SIPP, the elements to consider before investing and what the next steps are if you proceed with this retirement investment option.
- The pros and cons of a SIPP
- How a SIPP compares to other types of pension
- Who SIPPs are for
- Tax Benefits
- Investments fit for SIPP
Investing in a Self-Invested Pension Plan (SIPP) can make a considerable difference to your retirement funds and could have a substantial effect on your wealth in retirement.
If you’re thinking of setting up a SIPP, but unsure about where to start, then we’d be very happy to discuss this with you. Contact us on 01582 802000 or email us at firstname.lastname@example.org with any queries.
We are very happy to talk to your SIPP or SSAS provider directly to discuss including BondMason-sourced investments into your pension. Alternatively, we can introduce you to the SIPP and SSAS administrators that we already work with.
As always with investments, with a pension your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest.
Nothing in this article should be construed as advice. Your capital is at risk.
Direct Lending (including Peer to Peer Lending) is classified as a non-standard asset for SIPP investing. The team at BondMason have developed an innovative investment structure to remove many of the potential administrative issues making BondMason the go-to partner for leading SIPP administrators. If you are already managing your own future with a SIPP or would like to read more about the new BondMason SIPP service click on the button below.