Planning for your retirement can be tough. The state retirement age keeps changing, the Government can’t make its mind up whether it wants you to invest in a Workplace Pension, Lifetime ISA or a SIPP and nobody can tell you how much you need for a comfortable older age.
As a nation it’s clear we need to need to take greater responsibility for our retirement, what with the Government failing to rule out pension age changes, and most employers no longer offering the generous pension schemes of the past.
One of the toughest questions we all face is when to start planning for retirement – and the simple answer is, the sooner the better.
Planning for Retirement: The earlier the better
The first rule of planning for retirement is that the earlier you start, the better off you will be. It’s simply all about compounding. The longer your money is invested, the more chance it has to grow (use our calculator to see how compounding helps your money grow over time).
Facing a looming retirement crisis, the Government has taken action by introducing the Workplace pension in 2015. As a result, anyone over 22 will automatically find themselves with a pension.
Employers will likely match your contributions up to a certain point, a figure it’s certainly worth matching to avoid missing out on free money. Unfortunately, even with tax relief and matched contributions it’s highly likely you’ll get the kind of retirement you want by relying on this pension alone.
As a result, savers of any age need to think about investing in a private pension like a SIPP or an investment product like the Lifetime ISA. Both offer you control of your retirement investment, while allowing you to put your money away for the long-term. As well as being in control of your investments, you’re likely to be spreading the risk too – a wise move.
Savers – particularly those who are just starting out – face conflicting priorities about where to invest their money. Many choose property over pensions.
It’s sensible that you’ll want to get a roof over your head, and it’s arguable that property is one of the wisest investments out there, but investing solely in property could leave you heavily exposed to a single type of investment that might struggle in the future.
Owning a property and saving for retirement aren’t mutually exclusive. You need to find a balance between short-term priorities and your long-term goals.
The Government has stepped in here, creating the Lifetime ISA. It’s a somewhat controversial new scheme, which we have already explored, but offers an alternative way to save for your retirement as well as helping you to get on the property ladder.
The question of how much you need to save for retirement is a complex one, but it’s not rocket science to see that the later you start to build up your pot, the greater the amount you will need to invest.
On top of that, one of the biggest mistakes many savers make is in failing to increase the amount that they invest as their earnings increase.
A reasonable suggested sum would be between 10 – 15% of your gross monthly salary into a pension, but it depends on your personal circumstances and how much you can afford. Having a financial plan can help you decide how to manage your money and what the impact of short-term decisions can be on long-term goals.
SIPPs and Lifetime ISAs offer you the freedom to vary contributions, even taking a break if you need to. For those nearing retirement or higher rate taxpayers there can be specific tax advantages from investing larger amounts in pensions. It’s a complicated area, and it’s worth getting the advice of a professional financial adviser.
Planning for Retirement It’s never too late…
Whether you’re 15, and starting out 50 years before the end of your career, or 30 and starting to feel a bit more urgency, you can make a difference to the kind of retirement you can enjoy by taking action. Even investing small amounts regularly will have a positive effect on your retirement.
It’s also worth considering the investment choices you make can have a massive impact on the growth of your pension pot. The reality is that poor investment choices and large fees can take their toll.