Pensions: How to save as much as possible for your pension whatever your age
A recent report by insurer Royal London said that homeowners need to save a whopping £260,000 into their pension pot to have a ‘decent’ standard of living in retirement.
That might sound a figure way outside of your reach – but don’t panic. The right planning goes a long way. Here are some of the most common questions I’m asked about pensions, and my tips on making the most of yours.
How much do I have now?
You should be receiving a statement every year from your pension provider(s), if you’re not then get in touch with them to check the address they hold for you.
There are two main types of pension:
- Defined contribution – this has a fund value, a clear total monetary amount
- Defined benefit, AKA final salary – this is an income rather than a fixed value, e.g. £5,000 per year
Look back at your working life, think about whether you joined a pension scheme in your various jobs. If you have statements, use the asset statement on my site warrenshute.com to record your savings and make sure you know the values of your pensions.
If you’re not sure or can’t recall if you joined a scheme, the government has a pension tracing service you can use: gov.uk/find-pension-contact-details. You can also find details about your state pension.
What’s my magic number?
It’s going to sound a little counterintuitive but try to avoid this, because it can be disheartening just to look at the final figure.
It’s more important to consider the steps needed to reach your retirement income. If someone is just starting out on pension planning and they want a retirement income of £35,000 a year and I say, ‘OK you need to save £1m’, it can have the effect of making them think, ‘Why bother?’
You need about £100,000 for every £3,500 of income you want in retirement, so we’re talking big sums. If you focus only on that big sum, it’s too big a mountain to climb.
That’s why you should focus on the things you can control. That begins with getting organised and finding out what you have saved up already.
In the UK every employee is offered a workplace pension thanks to auto-enrolment law. They’re set up for you, they’re typically low-cost and have decent enough funds to choose from.
In order of preference when you’re saving into a pension:
1. The first place you should go is your workplace pension, without question.
2. If you don’t have access to a workplace pension then set up a personal pension.
You can do this easily online (I have a site called Lexo.co.uk for example), it’s nice and straightforward.
The only exception is if you already have a lot of pension money saved up and you might breach some limits, but for most that’s not something to worry about (and if you are in that category, you should be taking financial planning advice!). If you run your own business, set up a personal pension and direct your money there.
Should I monitor my pensions?
You should be monitoring it once a year, it doesn’t need to be more than that.
Once a year is a good time to review all your expenses, and you should add your pension performance into that process.
What is important is that every year, you try to increase your contributions, even if it’s by a small amount.
Those small amounts add up because of indexation over time, so every year try to put a little bit more money into your pension.
Maximising your retirement income
There are three things that have the biggest effect on how much you have in retirement:
1. When you start
The earlier you can start the better. Do not underestimate the importance of this! Let’s look at an example for someone just getting into work:
Saving £50 per month from 20-40 years old and stopping, leaving the investment until you are 60, would give you £54,055 at a rate of 5 per cent pa. If instead you waited and started at 40 years old and you thought you would catch up by saving double, £100pm from 40 to 60, you would only have £40,746 – that’s 25 per cent less and you paid in twice as much.
Compounding interest is truly the 8th wonder of the world! But don’t less this put you off if you’re getting started late. Remember that golden rule: the best time to start was yesterday, the second best is today.
2. Indexing your premiums
Increase the amount you’re putting into your retirement each year if you can, even by a little bit. Over the many years until you retire, this makes a big difference.
3. Investment exposure
If you have time on your side, take more risk by increasing your exposure to the stock market. My rule of thumb is to measure that risk by 100 minus your approximate age: if you’re in your 20s, 100-20 = 80, so put 80 per cent of your money in the stock market. If you’re in a workplace of personal pension, you can request to be more aggressive or more cautious with your investment. The older you are, the more cautious you should be.
Warren Shute was named the UK’s Financial Professional of the Year (2017) and his first book, The Money Plan, is now available on Amazon. Get more money tips at www.warrenshute.com. @warrenshute