It can be tough thinking about funding your retirement when you’re still paying off a mortgage or saving for your children’s education. But, as our experts explain, it’s never too early to start planning for your pension.
Words: Rosalind Ryan, Photography: Getty Images.
Do your eyes glaze over when someone says ‘pension’
You’re not alone.
One in three 35-to 44-year-olds hasn’t given any thoughts to how they will manage financially in retirement, according to the FCA’s Financial Lives survey. Meanwhile, recent VitalityInvest research suggests that while many Brits are looking forward to spending their retirement travelling and relaxing with family and friends, 44% of UK adults don’t think they’ll have enough money to do so. And if you have a healthier lifestyle, you’ll need to save even more money to continue a healthy, happy and affordable life in retirement.
Failing to get to grips with your financial future can have serious – and expensive – consequences. Here’s how to sort out your retirement funds, fast…
When should I start thinking about my pension?
“Ideally, you should start saving from your first pay cheque,” says financial adviser Lisa Conway-Hughes.“A general rule is to save half your age as a percentage of your salary – if you’re 40, you should be saving 20%.”
Yet one third of UK adults aren’t saving for their future. If you’re one of them, start doing something – today. Get some financial advice to work out how much you’ll need after retirement, so you can calculate how much you need to save.
How can I save for the future?
Most of us have to make tough choices when it comes to spending money. “Saving or putting money into a pension may feel like giving up your money today. But, if you think of it as giving yourself more choice in the future, it can make that decision easier,” says Sarah Pennells, founder of SavvyWoman.
Obviously, there are some outgoings you can’t cut, such as a mortgage, but think of a pension as financial self-care. “If you don’t do it, no one is going to do it for you in retirement,” says Conway-Hughes. “You need to prioritise yourself, because the alternative – the state pension – is no alternative at all.” For 2018/19, the state pension is just £164.35 a week, or £8,546.20 a year, which needs to cover all your expenses including housing, bills and food.
What’s the best way to save for my retirement, then?
A pension is a no-brainer if you’re employed, because your employer will pay contributions into it too. “Even if you work for yourself, a pension is still a great way to set aside money,” says Pennells. “The tax benefits of a pension should make it the first port of call,” adds Conway-Hughes. “With other investments, such as savings or property, you may have to pay inheritance tax, income tax or capital gains tax on them.”
Do I need to think about upping my contributions?
“Get into the habit of saving money when you have more, such as a bonus at work,” says Pennells. “Or, see where you can make savings in your bills and use that money.” You can reduce your contributions again if money gets tight later on. Remember that you should regularly review where your pension is invested and whether your investment is still right for you.
Is taking a lump sum out of my pension a good idea?
You can’t normally take money out of a pension before the age of 55, which is a good thing. It means you’ll have money ring-fenced for retirement. You can take a tax-free lump sum of 25% of your pension after age 55, but be careful.
“Just because you can do something, doesn’t mean you should,” suggests Pennells. “Only take money out of your pension if you really need it to live on.” Conway-Hughes adds that it’s only worth taking a sum out if you’re sure you won’t have to go back to work to fund your retirement.
How can I look after my long-term financial health?
If you don’t yet have a pension, get some advice about the right one for you. You can also invest in ISAs, which are tax-free, including a Lifetime ISA for those saving for their first home or retirement where the government give you a 25% bonus every year. Whatever you decide to invest in, do it today.
“You can’t turn back the clock,” says Pennells. “I’ve met plenty of people who wish they’d put more money into their pension, but I’ve not yet met anyone who says they’ve got too much.”
Need some extra help reaching your financial goals? Check out Vitality’s investment plans.