Step 6: Retire When You Want To

We all know that we need to save money for our retirement, but knowing it and doing something about it are very different things!

A look at what you might get from the Basic State Pension might help spur you into action. It’s currently around £116 a week (or £6,000 a year), although a new State Pension is being introduced in 2016 which is likely to be around £150 per week (or £8,000 a year).

There are many nuances which decide what you’ll actually receive, but the simple takeaway is that, whatever you end up being entitled to, it’s probably going to be a lot lower than you’re earning right now. And if your dream is to retire early and spend a couple of decades gallivanting around the world, then it’s clear that relying on the Basic State Pension isn’t going to cut it.

Beat the pension crisis

When you take a step back, it’s not surprising we need to save a lot more for our retirement. It used to be the case that you worked for, say, 40 years and then were retired for around 10. Nowadays, it seems that we expect to work for 30 years and be retired for 30 as well. The sums simply don’t add up.

It’s also not helped that the rules surrounding pensions have changed enormously in the last 10 years. Some of the changes have been beneficial, as costs have come down, but the choices available to us have undoubtedly become a lot more complex as well. Throw in some scary pension scandals, like Equitable Life, and no wonder many people are put off and aren’t saving enough for their retirement.

Fools certainly shouldn’t despair though. Building up a decent retirement pot is still feasible, and doesn’t need anything overly complicated or magical. Start saving early, join a company plan if there’s one available (many employers will still contribute cash on your behalf), and keep on investing on a regular basis.

With compound interest at work, investments made when you’re young can become much more valuable when you’re older. Putting aside even a small amount can make all the difference in the world when you come to retire, and you can always increase the amount you invest in manageable steps.

Start a personal pension

Retired couple on a bench

Photo: Candida Performa. Licence: https://creativecommons.org/licenses/by/2.0/

Personal pension plans are a way for people who don’t have access to an occupational pension scheme to defer tax as they save for retirement. Your pension payments usually go into an investment fund, although you can also get Self Invested Personal Pensions (SIPPs) where you get much more control over how your pension fund is invested.

You receive tax relief on the payments you make: for basic rate taxpayers, the Government pays £25 into your pension for every £100 you put in, and for higher rate taxpayers there is an additional £25 of tax relief for every £100 you pay in. On retirement you can take out up to 25% of your pension as a tax-free lump sum, and the rest can be used to provide you with a taxable income throughout your retirement.

Stakeholder pensions are personal pensions with a few unique features. Firstly, they must meet certain standards set out by the Government. They’re penalty-free and they usually cost less than personal pensions if you’re putting in small amounts.

SIPPs, or self-invested personal pensions, are another personal pension option. With a SIPP, you pick the investments yourself, such as shares, funds, bonds or even business properties, and wrap them in the benefits of a pension. For the most part, SIPPs are subject to the same rules and benefits as other pensions, including tax breaks, limits on contributions, and the 25% restriction on the tax-free lump sum.

Join a company scheme

If you have a company pension scheme, it nearly always makes sense to join it, especially when you don’t have to make contributions. With your employer putting money in on your behalf, not joining a company scheme is, effectively, refusing free money – and who would do that? Even if you have to contribute to your company pension, opting out is still turning down free money: less than half of the money you ultimately get through a company pension plan actually comes from your pay – most of it comes from your employer and through tax breaks.

If you don’t have access to a company pension scheme, don’t worry. You will probably need to save a little bit more, but it’s manageable. It makes the most sense to save in a tax-efficient way – usually a personal pension or an ISA (more on these in Step Eight). Note that while you can put more into a pension than you can an ISA, a pension is not as flexible when the time comes to actually get at your money.

A final note on saving for your retirement

Although your pension is an important part of  your retirement savings plan, most people will find it make sense to build on it with a range of other savings and investment vehicles, from ISAs to funds and shares.


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