With the State Pension currently worth a maximum of £155.65 a week, making additional provision for your retirement is essential if you want the financial freedom to enjoy your later years.
Saving for retirement doesn’t need to be complicated, although it’s always helpful to pose some key questions, for example:
- How much will you to need to live on?
- How long do you have to save for retirement?
- When do you want to retire?
- How will inflation affect you?
- Will you qualify for a full state pension?
Finally, what sort of investment products or accounts should you use to achieve your goal?
So, what’s the best way to save for retirement?
According to research from Retirement Advantage and YouGov. most over 50s believe that pensions are still the best way to save for a comfortable income in retirement, and have more confidence in pensions to provide security and good returns over other products.
The survey also found that:
- Well over half of over 50s surveyed, said they would recommend pensions as the best way to save for retirement to someone entering the workforce today
- 30% would neither recommend or were against pensions
- 9% said they would not recommend a pension as the best way to save for a comfortable retirement
Pensions also featured at the top of the list of types of financial products that over 50s have confidence in to keep their money safe and deliver good returns, with net confidence at 40%.
Pensions seem to be the preferred way to save for retirement. With tax advantages, employer contributions and the additional flexibility from pension freedoms, they provide a solution for many people. However, the amount you can save into a pension is limited, and other methods such as ISA investment may offer an alternative or additional way to save.
Those surveyed also stated that they have high confidence in other traditional savings vehicles, including:
- Buy-to-let properties (40%)
- Cash ISAs (38%).
- Stocks and Shares ISAs although confidence was significantly lower at 25%.
- Recent developments like peer-to-peer lending have the lowest levels of confidence at 10%.
Back to the original question
What’s right for you?
There’s no easy answer to that, it will be different for every person who reads this article.
For most people the state pension will form the foundation of their retirement income. It then generally makes sense to take advantage of employer contributions and tax-relief to use pensions to bridge some of the gap between the state pension and your desired level of income.
Other types of savings and investment will also play a part; and the answer for most people, is a mixture of assets.
The choices in more detail
There are several ways to save for retirement:
Workplace pensions: Also known as occupational company pensions, group personal pensions and Auto Enrolment, these are arranged by your employer. Your employer contributes to the fund as well as you.
Under relatively new Auto Enrolment legislation, where a suitable workplace pension is not already on place, all employees aged between 22 and the state pension age who earn more than £10,000 a year should be offered a workplace pension by 2018.
Personal pensions: Let you save on your own behalf, either alone or alongside a workplace pension. You pay regular monthly amounts or a lump sum to a pension provider that invests the money on your behalf.
You can vary personal pension payments as your income changes throughout your working life. The provider will usually offer a range of investment funds, giving you greater choice than a workplace scheme.
Contributions to pensions benefit from tax-relief. This means that the government is effectively topping up your own contribution.
If you are a basic, 20% taxpayer, this means that for every £80 you contribute an additional £20 is added, taking your total contribution to £100. A higher rate, 40% taxpayer, can claim back an additional £20; a £100 contribution therefore only ‘costs’ £60.
There are limits on the maximum amount of tax-relief you can claim, but it is nevertheless the main attraction, for many, of pensions.
Buy-to-let: Has become a talking point for those saving for the future. By investing in property, it may be possible to take rental returns as income and enjoy capital growth. However, the buy-to-let market is undergoing major changes, and it may not be possible to look forward to the kind of returns available in the past.
ISA investments: Can provide a cash lump sum independent of any pension plan.
A Stocks and Shares ISA, or indeed a Cash ISA, is often used to supplement existing pensions and is popular because, despite the lack of tax-relief on contributions, it allows access before retirement.
The new Lifetime ISA, available from April 2017, may be appropriate if you are under 40. It allows you to save up to £4,000 each year, and receive a government bonus of 25%, up until the age of 50. Money can only be withdrawn without a penalty before the age of 60 if you use it to buy a first home, but when you turn 60 you can take out all the savings tax-free.
All ISA investments offer substantial tax advantages. Most allow you to invest up to a maximum of £20,000 per year from next April, and enjoy all the returns your money earns tax free, unlike a pension, which may leave you with a bill for income tax.
Other investments: Such as investment funds and direct share lending, whilst higher risk, can also be used to build wealth. While they may offer the potential for excellent returns in the long term, they offer neither the tax advantages of Pensions or ISAs, or any kind of guarantee.
What should you do now?
It’s never too soon to start thinking about the future, and while most people have confidence in pensions as the way to save, ISAs and direct investments may also have their place in balanced retirement planning.
We are here to help.
If you are concerned about your retirement savings, the amount you are putting away, or the vehicle you are using, please call us on 0115 933 8433, we’d love to have a chat.
The Financial Conduct Authority does not regulate Workplace Pensions and Buy To Let investments.
Investments and the income from them can fall as well as rise. There is no guarantee that you will make a profit.
Tax Relief is dependent on your own personal circumstances and are subject to change.