If you want to ensure a comfortable retirement, start thinking about saving more now – here’s how to do it
Contents hideInside the pensions crisis
Retirement feels more uncertain than ever, with nearly six in 10 adults unsure if they have enough time to save for a pension. Successive governments have struggled to address the issue. So, how did we get here, and what can be done to fix it? The i Paper brings you the essential stories on what went wrong with pensions, along with expert insights into the policies and solutions that could help secure your financial future.
Read more:
Triple lock state pension is broken – here’s how to fix it
Teachers blocked from swapping big pensions for higher wages
Why the state pension triple lock is closer to being axed than you think
For many, retirement seems like a distant concern, something to address later in life. But for those hoping for a comfortable retirement, they will have to start saving sooner rather than later.
According to the Pensions and Lifetime Savings Association (PLSA), a “moderate” retirement lifestyle requires an income far beyond what the state pension offers.
It also suggests that Britons may need close to £1m in pension savings to maintain a “comfortable” standard of living in their later years.
The PLSA defines this as a “lifestyle that allows you to be more spontaneous with your money.”
Although this sounds like a large sum, experts warn that as people live longer, higher amounts of retirement savings are needed.
So, how much do you actually need to save at different stages of life to reach a £1m pension pot by retirement? Here, The i Paper takes a look, based on calculations by Quilter for a basic rate tax payer (20 per cent) throughout their life.
The numbers reflect that when withdrawing a lump sum from your pension, only up to the first 25 per cent is usually tax-free and doesn’t affect your personal tax allowance. Withdrawing anything more than this is taxable at your usual tax rate.
The figures also account for inflation but people may need to still increase what they are paying depending on how much inflation increases by.
In your 20s: The power of starting early
Starting at age 20: Contribute £320 each month to your pension(£256 into your pot and £64 in tax). This is the total contribution – if you are in a workplace scheme that would be a split between you and your employer. It is also based on increasing contributions by 3 per cent annually (as amount of cash) until turning 65.
The earlier you can start contributing, the better the chance you have of building a £1m pot. If starting in your twenties, saving £320 a month, and increasing contributions by 3 per cent each year until you are 65, should be enough to reach £1m.
Ian Futcher, financial planner at Quilter, says the first thing to do when you get your first pension, often via the workplace in your early twenties, is to check how it is invested.
“More often than not, a workplace pension will be invested in a default fund that may not be appropriate to your circumstances. Pensions can’t be touched for a good thirty years, so having exposure to higher risk assets (equities) is going to be crucial to build your pot over the long-term.
“Next, ensure you have filled out an expression of wish form so that in the event you pass away, the trustees of your pension know who the money is to be passed on to.
“This will likely change as your life progresses – for example, if you have children or get divorced, you may want to change who is on the form. Remember, you can have more than one person, and you can divide the assets as you wish.”
In your 30s: Managing multiple pension pots
Starting at age 30: Contribute £600 each month (£480 into your pot and £120 in tax), with a 3 per cent annual increase until turning 65
Over the years you are likely to move jobs multiple times. Gone are the days of a career at one company for your whole life, but with this brings a number of pension arrangements.
This is where it is important to make sure you don’t lose track of these pots.
Futcher advises: “It is important to do your research, check which pension arrangement suits you best and consolidate pots as you go – ensuring you don’t lose track of any as you switch jobs or careers.
“Furthermore, be sure to check out your employer’s contribution policy to ensure you are maxing out the amount they will pay into your pension, as some do go above the minimal threshold.”
In the UK, the minimum threshold for employer pension contributions is 3 per cent of an employee’s qualifying earnings, with the total minimum contribution for both employer and employee set at 8 per cent.
In your 40s: Prioritising family and future security
Starting at age 40: Contribute £1,300 each month (£1,000 into your pot and £300 in tax), with a 3 per cent annual increase until turning 65
If you have started a family, this is a good time to review pension arrangements, Futcher says: “It is important that both you and your partner have a pension to ensure adequate levels of savings across the family unit.
“This will also help with any divorce proceedings should it come to that, as it ensures assets can be split more fairly and efficiently.”
If you have children, one thing you may want to consider is opening a junior pension for your children, he suggested, giving them a vital start to their retirement journey with close to 60 years of investment horizon ahead of them.
“You don’t need huge sums to open a junior pension and every little helps to get them on their way.”
A junior SIPP allows a parent or legal guardian to set up, manage and contribute towards a child’s pension. The annual contribution limit of £3,600 includes basic rate tax relief of 20 per cent – even though the child is a non-taxpayer – meaning investors only need to contribute £2,880 each year in order to reach the maximum annual contribution limit.
Currently, the top two junior SIPP providers are Fidelity and AJ Bell. Fidelity offers a junior SIPP with no annual platform fee, making it a cost-effective option for long-term investing.
AJ Bell charges a 0.25 per cent annual fee, with a maximum of £3.50 per month, but offers a wide range of investment options, including shares, ETFs, bonds, and funds.
In your 50s: Catching up and tax efficiency
Starting at age 50: Contribute £3,200 each month (£2,560 into your pot and £640 in tax), with a 3 per cent annual increase until turning 65
As life progresses, you can start to earn considerable amounts of money and you begin to build up levels of excess income, over and above your general and emergency savings.
At this point, it may be time to consider investing in a personal pension too as it will give you a central place that you can consolidate old pension pots into, ensuring you have a wide range of investments to choose from.
Futcher highlights: “Pensions provide that added benefit of tax relief, so any contribution will be boosted, making the vehicle for long-term savings.
“Furthermore, if you start earning over £100,000, you start to lose your personal allowance (the amount of income tax-free earnings) which carries a 60 per cent effective tax rate.
“Making a personal pension contribution helps to lower your taxable income and thus stop this happening. And if you start earning over £260,000, your annual pension contribution allowance will begin to be tapered so it’s important you check how much is being paid to their pension, so you don’t exceed that allowance.
“It is so important for any salary increase to just take a minute and work out what impact that is going to have on your tax and pension situation.”
The wonder of pension tax relief
When you put money into a pension, the income tax you would normally pay is usually added to your pension instead – something know as tax relief.
It means your savings are usually boosted by 20 per cent or more, depending on your rate of tax.
Each tax year until you’re 75, you can usually get tax relief on all your pension contributions, up to the amount you earn and your annual allowance – this is £60,000 for most and covers all payments into your pension, including any from your employer.
When withdrawing your pension as a lump sum, only up to the first 25 per cent is usually tax-free.
If you take no more than your tax-free cash amount, typically up to 25 per cent of your pension pot, you can still contribute to your pension.
In your 60s: Reviewing your pension strategy
It would be too late to start saving in your sixties
For people in their sixties, it will be too late to start saving into a pension for a £1m pot – unless they are given a windfall.
However, as these people approach the end of their working lives, it is a good opportunity to take stock of where your pension is at, what objectives you have achieved and where you might have fallen short – and what you can subsequently do about it.
Futcher says that financial advice really helps here so that you make the most informed decision ahead of giving up any salary you currently receive: “This will also be the time when you begin to de-risk your pension pot and move it into less volatile assets.
“This is crucial to help prolong the longevity of your pot but be careful – going too cautious and you may find your money does not grow enough during retirement to keep up with inflation or spending patterns.”
In your 70s: Keeping an eye on your pension
It would be too late to start saving in your seventies
Those in their seventies are likely to have retired already – or will be soon – meaning it is probably too late to start saving. However, it is important to keep an eye on your pension and make adjustments as needed.
While you may not be contributing as much or at all, ensuring your investments are still working for you is crucial. Futcher suggests: “You might also consider drawing down your pension in a way that maximises your income while preserving your capital.”
Why saving into a pension is essential for retirement
A “million-pound” pension may sound like an enormous sum to most people, but it is in fact achievable for those who contribute consistently over long periods of time, Jason Hollands, managing director of Evelyn Partners, says.
Speaking to The i Paper, he adds: “The key message is that the earlier you start, the better the position you will be in thanks to the magic of compound returns – the effect of the returns you make on the gains you achieve as the pot grows, not just the amounts of cash originally invested.
“As the figures demonstrate, if you delay starting to save for your retirement in the belief that it is so far off it is something that can be parked on your to-do list until later on in life, you are going to struggle to play catch up in your fifties, and will have to commit much larger sums than if you had started contributing a much more modest sum regularly earlier on.”
Most people are automatically enrolled into workplace pensions and Mr Hollands points out it is “very wise” to stay in these – do not be tempted to opt out for a bit more cash in your bank account each week.
“Not only would opting out of your work pension be a big long term mistake, you will also effectively be turning away ‘free’ cash from your employer who is required to contribute alongside you,” he says.
“While the widespread availability of workplace pensions is very positive, the minimum contribution levels required under auto-enrolment are not especially high and so don’t assume that these alone will provide you with a comfortable retirement.
“If you are able to, it is wise consider adding additional contributions when you are able to. This might be done by investing part of a bonus into a pension, or forgoing part of a salary increase in favour of higher pension contributions if your employer allows.”
Inside the pensions crisis
The i Paper brings you the essential stories on what went wrong with pensions, along with expert insights into the policies and solutions that could help secure your financial future.
Teachers blocked from swapping big pensions for higher wages. A trust of nearly 100 schools planned to offer teachers the chance to take home higher pay in return for smaller pension contributions from April, but has been stalled after a Government intervention. Click to read.
Why the state pension triple lock is closer to being axed than you think. Labour MPs are starting to go where few politicians fear to tread – discussing reform of the state pension triple lock. Click to read.
Triple lock state pension is broken – here’s how to fix it. Sir Steve Webb, the former pensions minister, says every political party wants to get rid of the triple lock. Click here to read.
