It is drummed into us regularly that we need to invest for a comfortable retirement. But often, life and other financial commitments get in the way, we don’t fall for it, and then — before we know it — we’re on the road to retirement with very little hidden.
In fact, one in five Britons say they have no form of personal or workplace pension, according to a recent survey by comparison site Finder.com. Yet it’s never too late to start building an investment nest-egg. Even if you have invested very little to date, it is still possible to get started and build something worthwhile. Here’s how to build that nest-egg.
20-40 years old: Start small for big returns
This is a good time to start building a retirement fund. It’s often not easy to get extra cash, but even a small contribution to a pension or tax-advantaged ISA can make a huge difference.
Nest egg: It’s the drumming inside us regularly that we need to invest for a comfortable retirement
That’s because the money you set aside early is too big to snowball thanks to the power of compound returns.
If you’re an employee, put as much as you can into your workplace pension – most employees are now automatically enrolled in a plan. This way, you will get the benefit of your employer’s contribution as well as tax relief from the government.
So, if you’re a basic-rate taxpayer and want to contribute £100 from your salary to your pension, it will actually only cost you £80. The government adds an extra £20 on top of what it would take in tax from £100 of your salary.
If you are self-employed, you must set up your pension yourself. Such workers are least likely to receive a pension: of the 5 million self-employed people in the UK, only 15 per cent are saving in private pensions.
The self-employed are still able to benefit from tax relief on contributions. A self-invested individual pension (SIPP) or stakeholder pension are two good options. Some plans are specifically designed for self-employed workers and therefore allow you to vary your monthly contributions as cash flow allows.
Lewis Oliver of Piersfield Oliver, a Cheltenham-based financial advisor, suggests that lifelong ISAs can also be a good option for savings, especially for the self-employed.
These are tax-free savings vehicles that you can open if you are between 18 and 40 years old. You can save up to £4,000 per year and the government will make a bonus contribution of 25 percent.
They are designed to be used only for deposits on the first home – or for pensions. ‘With Lifetime Isaas, you really should be able to use them for home deposits or retirement funding,’ Oliver insists. ‘Otherwise, there are penalties if you withdraw money for something else.’
It can be tempting to act with caution when you start building a nest-egg – to protect the small amount you’ve managed to earn. But you need to take the risk to stand a chance of good investment returns – that means investing in equity or equity-based funds through your pension or ISA. You can take investment risk at this age as you have decades to recover your investments from any downturn in the stock market.
Keeping money in savings accounts may feel safer than investing, but they are actually losing value because some accounts currently pay inflation-beating interest rates.
40-60 Years Old: You Can Still Catch
If you hit your 40s — or later — and you have nothing or little to do with your future, you still have time to catch up. But you have to save a higher percentage of your earnings. It’s also worth checking if you actually have a pension or two established by a former employer, however small. The government has a free pension tracing service: gov.uk/findpension-contact-details or phone 0800 731 0193. Romi Savova, chief executive of online pension provider PensionBee, says: ‘The average person will have 11 jobs in their lifetime. This can mean 11 different pensions.
If you are employed, make sure you contribute as much as you can to your workplace pension. It can be difficult to prioritize savings for some years when you have a lot of costs, especially if you have children.
But being financially independent in later life makes life easier for both you and your family. Even making a small pension contribution each month will make a difference later. Olivia Kennedy, financial planner at Wealth Manager Quilter, says: ‘Someone who contributes £100 per month to a pension from the age of 40 will accumulate a pot of just over £24,000 by the age of 55, assuming That the annual investment return is five percent. ‘
Sean McCann of pension provider NFU Mutual says many people in their 50s think it’s too late to invest in a pension — when they haven’t. He says: ‘The fact that you can withdraw money from your pension from age 55 onwards means that once you reach your 50s and 60s, you have to take advantage of tax benefits. There is no need to lock your money for decades.
As you approach retirement age, check to see that you are still taking on an appropriate level of investment risk. Still, just because you’re getting older doesn’t mean you have to rein in the risk of investing completely.
Rebecca O’Connor is the Head of Pensions and Savings at the wealth platform Interactive Investor. She says that when you’re in your early 50s, and assuming you don’t plan on leaving work until age 67 or 68, you can still take some risk with your pension investments.
“It’s a very long time frame,” she says. ‘It gives you a better chance to grow your contribution than if you had opted for a low risk investment option.’
In fact, if you plan to keep your pension invested beyond retirement age, you may be able to take on even higher investment risk.
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