Here’s Why You Might Need To Double Your Pension Savings

It’s time to top up those SIPPs and ISAs if you want a comfortable old age.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

For those of us investing in our pension pots, at least one fear has disappeared after chancellor George Osborne revealed on Friday that he’s dropped plans to end or alter tax relief on pension contributions. The possible details were uncertain, but one thing is sure, he wouldn’t have been doing it for our benefit.

But don’t let that lull you into a false sense of security, and don’t just assume that any occupational pension scheme you have will necessarily be adequate for your retirement needs, because a new review conducted for the Labour Party has concluded that most workers are only stashing away around half the amount they’ll need to see them comfortable in their old age.

We need to save more

The Independent Review of Retirement Income (IRRI) has determined that workers should be aiming to put away around 15% of their salaries for their retirement, and a number of investment professionals agree that the figure is about right. And at the moment, typical contributions to workplace pensions amount to a mere 4.7%.

The government’s automatic enrolment scheme (which obliges all employers to provide pension schemes for eligible workers) is partly to blame. How so? In order to soften the impact, the early contribution requirements were deliberately set low. Minimum total contributions started out at 2% of earnings, though that should rise to 5% by 2018 and 8% a year later.

But even then, that would still leave members of such plans with contributions amounting to only a little over half the IRRI recommended rate — most of us, it seems, just aren’t saving enough. The big question is, what’s the best vehicle to use for those extra retirement savings?

Contributing more to your company pension scheme might be beneficial, but I think it depends on how much your employer is going to contribute too — so that needs to be decided on an individual basis. Other than that, there are two attractive options — a Self Invested Personal Pension (SIPP) or an Individual Savings Account (ISA), which have different tax advantages.

Which is better?

If you go for a SIPP, your contributions will be taken from your income before tax, but when you retire and draw down your pension, the money will then be taxed. No overall benefit then, you might think — but no. Firstly, in retirement you’ll still have an annual tax-free allowance. And secondly, if you’re a higher rate taxpayer when you’re paying-in, you’ll get better tax relief and you’ll benefit from your basic rate allowance in retirement.

With an ISA you can invest up to £15,240 in the current tax year — and the tax difference is that you don’t get any tax relief on contributions, but your gains within the ISA attract no capital gains tax and no higher-rate income tax on dividends.

Whichever way you go (and the best option might be a combination of SIPP and ISA depending on your circumstances), by far the best investment you can make is to put the money in shares. Investment charges are low these days, and the stock market has far outperformed cash savings for a century and more — and when you’re investing for a lifetime, short-term ups and downs get ironed out.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »