Why you should save for a pension now, however old you are
We need to talk about pensions.
It’s not always a pleasant thing to start thinking about how you’ll fund your retirement, especially if that time currently seems very far way. However, the younger you start thinking about starting to save for when you’re older, the easier it is to save enough to live on when you retire.
The coronavirus pandemic has made it harder for many people to save for the future. When life is uncertain it is particularly hard to prioritise the types of savings you cannot access until you are older.
Figures from Royal London show that 40% of people aged 18-34 stopped paying into their pensions over lockdown, with the most common reason being they couldn’t afford to.
Lorna Blyth, head of investment solutions at Royal London, says that eight out of ten of those who paused their contributions are planning to resume them at some time.
‘It is vital that people follow through with their intentions to resume contributions as soon as they are able if they are to avoid long-term damage to their retirement prospects,’ she says.
If you are wondering whether you should restart, or start, a pension, here’s why it’s so important that you do so.
Why do I need a pension?
When you retire, you need to have something to live on. It’s all very well assuming you’ll ‘work til you drop’ but most of us should be planning for a significant period of downtime after our working lives when we do not want to work and aren’t physically or mentally able to continue at the same pace.
At present, life expectancy at birth is 79.5 years for men and 83.1 years for women, but another measure – healthy life expectancy – shows that you can’t expect to be well for all of that time. The average man will be healthy for 63.4 years and the average woman for 64.1.
Your pension needs to replace the wage you had coming in once you stop working, and it needs to last for the rest of your life.
Although most people will also receive the Government’s state pension, the full amount you can receive is only £175 per week, which is unlikely to be enough to fund most people’s living costs.
In the past, many people had so-called ‘final salary’ pension schemes as part of their jobs, which paid a guaranteed amount every month for their retirement. These are very expensive, and although some employers still provide them, they are far rarer.
Most of us now have what are called ‘defined contribution’ pension schemes, where your money is invested and can rise or fall over time, and you receive the value of the investments as your pension pot.
‘I need financial security’
Abbey Robb, an integrative therapist at abbeyrobb therapies.co.uk, moved to the UK from Australia four years ago. Now in her 40s, she’s only just set up a pension, and says that lockdown has inspired her to think about long-term financial stability.
Abbey 41, from south west London, opened her pension with NEST, which is the workplace pension scheme set up by the Government, and pays into it monthly.
‘It seemed like a credible option,’ she says. As a self-employed therapist whose work has been affected by coronavirus, Abbey has received grants from the Government’s SEISS scheme for self-employed people.
She has used these grants to make lump sum payments into her pension, making up for lost time.
‘I think the last few months have made a lot of us think about financial security – a pension is part of that,’ she says.
So, how much do I need to save?
Figures bandied about for how big a pension you’ll need can be daunting, especially when you’re just starting out. The good news is, though, if you’re younger, you’ll need to save far less of your pay packet into a pension to get there, because there is time for your investments to grow and compound.
Just as a snowball gets bigger when it is rolling up a hill, your investments grow and then that growth is added on – a process known as compounding.
The Government will help you, too. At present, the taxman adds back any tax you have paid on your income to your pension contributions up to a certain limit, whether you pay basic, higher or additional rate tax. This can help your pension pot grow faster.
Your employer also helps you to save for your pension. They must add a minimum of 3% of your salary each month, and some will add more if you do, so it’s worth investigating this as a possibility.
Figures from Which? suggest that a couple will spend around £40,000 a year to have a comfortable retirement (this assumes you’ll have paid off a mortgage, for example, so you won’t be spending as much as when you are younger).
To achieve this you’ll need a pension pot of almost half a million pounds on top of your state pension, if you choose to leave your pension pot invested and take money from it gradually after retirement.
Why should I start early?
The same Which? figures illustrate just how much easier it is to get to the target if you start when you’re 20. To get a pension pot this big, you’ll need to be saving £570 a month when you’re 20, £1,030 when you’re 30, and £1,735 a month if you leave it as late as 50.
And even if you can’t save that much when you’re young, you’ll be making a start and it won’t be so difficult when you’re older, because you’ll have something to build on.
Maike Currie, workplace investing expert at Fidelity International, says every little helps. ‘What may seem like a small step or decision now may have far more significant repercussions when you reach the point at which you actually want to retire.
‘Committing an extra 1% in workplace pension contributions can make a significant difference to how much you have in your pension further down the line, particularly if your employer offers to match these.’
‘I plan to get advice so that I’m saving enough’
Nancy Roberts, who runs Umbrella Analytics, focuses on the closure of gender pay gaps at work. As a result, she believes that it’s really important for her to have a handle on her own pension.
‘I strongly believe women should have a clear view on their own finances, and not just rely on husbands to “make sure they are OK”,’ she says.
She has just consolidated her pensions from different jobs into one privately managed pension pot so that she can have oversight over the whole thing. When the full consolidation is completed she will have amalgamated six pension schemes into one.
‘I sought independent financial advice on how best to manage this and have followed their recommendations on consolidation,’ says Nancy, 44, from Bury St Edmunds in Suffolk. ‘From there I plan to get financial advice to ensure I am saving enough.’
Pensions are only part of Nancy’s retirement planning.
‘My husband and I have also decided to maintain our previous properties as rental properties, with the view that when we retire we can either use the rental income to live off – assuming we have paid off the mortgages fully by then, which we plan to have done – or we could sell them and have a lump sum to invest for income.’
What if I’m self-employed?
Self-employed people have to set up their own pensions, and it can be extra hard to be disciplined with this when you’re focused on building a business. You don’t get the employer contributions, which makes things tough, but you do still get significant tax relief, so it still makes sense to use a pension.
Kate Smith, head of pensions at Aegon, says her company’s research suggests that self-employed pension savings have been the most affected by the pandemic, with 36% reducing their pension savings or stopping altogether.
‘One thing that the pandemic has clearly demonstrated is the need for financial resilience and access to liquid savings as well as pension savings to secure their immediate and longer term futures,’ she says.
Self-employed people can set up a stakeholder pension or SIPP (self-invested personal pension) with any of a large number of providers to ensure they are saving for retirement. A SIPP tends to be more expensive, but you can choose from many different funds and shares, and sell them and buy them as you wish, while a stakeholder pension may have only a few pension funds to choose from.
What should I do now?
Don’t panic! If you’re employed it is quite likely you already have a pension, and you may well have several from former employers, too.
You can track these down by writing to the pension trustees at your former employers and asking for a statement, and if you really can’t find them there is a pension tracing service.
In recent years it has become compulsory for employers to ‘auto enrol’ you into a pension unless you actively opt out of it. If you’ve done that, you need to consider whether it is worth opting back in. It isn’t just your contribution you are losing if you don’t, but the employer contribution and the government top up as well – that’s free money you are throwing away!
If you’ve stopped contributing to a pension or reduced your contributions during lockdown, now is a good time to see if you can start again. You can save up to £40,000 a year into a pension and receive government tax relief, so you can even catch up if you have a lump sum.
If you’re concerned you are not paying in enough, try to increase your contribution a little. It could pay huge dividends in future.
When can I get at my pension and what can I do with it?
Many people are worried about their pension savings because they can’t access them whenever they are needed. There’s a reason for that; they are there for your retirement.
However, you might be surprised by how early you can access your pension pot.
If you are 55 before 2028 you can take your pension at 55. After 2028 it is likely that the age you’ll be able to access to your pension will be 57.
At this point, you have several choices. You can choose to buy an annuity, which gives a guaranteed lifetime income, with the money; you can leave all, or some of it invested; or you can take it all out.
Whatever you choose, 25% of it can be taken as tax-free cash, but the tax position on the rest of it will depend on your choices.
It’s really important to take independent advice before you access your pension, and a good place to start is the government’s own Pension Wise service, which offers free appointments to those over 50.
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