Maybe you want to explore the world, downsize to a cottage by the sea, or potter about at home with the grandchildren.
Whatever you want to do, you need to start planning, now!
We know that to maximise your retirement, saving is a number one priority, but how can you go about it?
Start early
While retirement may seem a long way off, you can actually retire with pension income at 55, rising to 57 in April 2028, although the State Pension doesn’t kick in until you’re 66, rising to 67 between 2026 and 2028. This means if you leave school at 18, you only have just under 40 years to save – but less if you go down the university route. While this may seem like a long time (and you feel you can put off setting up a pension), this couldn’t be further from the truth.
If you’re aged 22 and earning over £10,000, your employer is legally required to enrol you into a workplace pension. As of 2024/25, the minimum contribution is 8% of the employee’s qualifying earnings (annual earnings between £6,240 and £50,270), which includes 5% from the employee and at least 3% from the employer.
It may be tempting to only save the bare minimum, but by putting in higher amounts when you’re younger, you can benefit from the longevity of the stock market. Over the last ten years, the FTSE 100 has averaged growth of about 5% per year, so these compounding gains combined with the tax-free growth within the pension wrapper become more powerful if they can be invested over a long period of time with a higher level of initial capital.
If you go down the self-employed/own business route, it’s imperative you set up your own pension. This fully allows you to utilise the tax advantages of a pension, potentially reducing the company corporation tax and lowering overall tax liability by making pension contributions. This can be daunting, and therefore taking advice from a financial adviser could be essential.
Always save something
Times can sometimes be tough, especially if you have a baby on the way or are buying a house for example. While it’s tempting to cut back on your pension payments, you should always put something away to keep your nest egg growing. Even saving £100 a month can have a massive effect on your retirement balance.
For instance, if you were to save £100 per month with an average return of 4% over 40 years, you could potentially see a final investment value of £118,000. Compare this, to say 20 years of monthly payments of £200, also at 4%, and you could see a final investment value of £73,000*. This is a huge difference, so starting smaller for longer is the best way to maximise your retirement savings – second only to starting bigger for longer!
Check your risk profile
As the old saying goes, ‘no risk, no reward’. While this may not always be true, by taking a risk, you could potentially receive a higher reward. Many pensions automatically fall into a default fund that may be way below or way above your actual risk tolerance. A quick risk assessment can help you decide the best way to invest your pension.
It’s not just pensions
While we’re programmed to believe our money in retirement will come from pensions, there are other ways you can boost your income.
Individual Savings Accounts (ISAs), General Investment Accounts (GIAs) and bonds may not be specifically for retirement but can all be used as vehicles to save towards your retirement.
Save tax efficiently
A great way to save tax efficiently is to discuss your pension with your employer and see if they’re willing to do salary sacrifice. This means the company will deduct money from your salary before tax and pay it into your pension, therefore reducing the amount of National Insurance Contributions you’ll be paying, as well as receiving tax relief at your marginal rate and not having to claim higher rates of relief.
If you’re a business owner, you could do this through the business, but it’s always best to speak to your accountant to ensure which level will suit you the best.
This article was written by Wealth Management Consultant, Tom Vazson.
This article has been produced for information purposes only and is based on our current opinion, which could change. With investments, your capital may be at risk and past performance is not a guide to future returns. Your investments can go down as well as up. ISA, pension and tax rules apply and may change. Mattioli Woods Limited is authorised and regulated by the Financial Conduct Authority.
*figures for illustration purposes only
Content correct at time of writing (November 2024).
