You probably already know that the full new State Pension in the UK currently stands at just £164.35 per week. However, you may not even get all of that because what you’ll receive is based on your National Insurance record.
You’ll need 35 qualifying years of paying National Insurance to get the full new State Pension. But with today’s difficult job market, many people have a patchy record on paying the National Insurance tax so you could end up with just a proportion of the new State Pension, or even none at all. My Foolish Colleague Edward Sheldon recently punched out an article reminding us of other undesirable traits of the new State Pension, such as you may be taxed on it, and the pension age is set to rise, which means you may not get it as soon as you think.
Taking control
It’s not much money to live on, is it? Of course, if you live with a partner you will both receive the New State Pension as long as you qualify according to the rules. But even then, if that’s going to be your only source of income, I reckon you’ll be heading for a modest and difficult lifestyle in retirement.
The only way around this problem is for you to take matters into your own hands and organise additional pensions or savings to supplement the new State Pension when you retire. That’s easy for me to say, but millions of people have difficulty saving money and never seem able to do it. However, failing to save is something that I reckon can be overcome by adopting a different frame of mind.
We can take inspiration from Elbert Green Hubbard, an American philosopher, publisher, writer and artist. He once said: “Many people fail in life, not for lack of ability or brains or even courage, but simply because they never organise their energies around a goal.” I reckon that’s a useful observation, and you can overcome a failure to save money by making the act of regular saving a goal. You can then organise your energies around the goal of saving.
These days, many people have heard of the acronym SMART, which is often applied to goals and targets. There are several definitions for SMART, but I like this one:
When setting goals, they should be made: S = Specific, M = Measurable, A = Achievable, R = Relevant, and T = Timely.
For example, you could make the goal of saving £50 per month. That would be specific because it’s quantified. It’s measurable at £50 and not a penny less. It’s achievable as long as you’ve done your personal budgeting sums properly. It’s relevant because you need extra savings to help finance your retirement. And it’s timely because it’s important to start saving for retirement as soon as possible, and for as long as possible. Indeed, saving £50 a month would be a very SMART retirement goal and a good start to your ongoing retirement saving plan.
How you can get others to save for you
You’ll really get your retirement savings moving if you find ways of making the saved money work hard for you. In the first place, it would pay to find ways of getting all the help you can and two methods stand out to me. The first is to participate in your employer’s workplace pension scheme. Most employers pay an extra 3%-10% of your annual salary into the scheme for you on top of what you pay in. So that’s a real bonus and it could kick-start your retirement savings and boost them for years to come. What’s more, all contributions into the scheme on your behalf attract tax relief, so that’s another boost to your retirement savings pot.
Another route you may be able to take that has added benefits is to save money into the new Lifetime ISA (LISA), which the government introduced during 2017. When you save into a LISA account the government will top up your annual savings with an extra 25%, which sounds like a great way to make your savings work really hard. However, there are quite a few rules. For example, you can only save up to £4,000 a year in a LISA and what you save forms part of your overall £20,000 a year ISA allowance. You must use the money you save in a LISA either for retirement or for the purchase of your first home. You must be between the age of 18 and 40 to open a LISA. My Motley Fool colleague Alan Oscroft looked at LISA in a recent article. On balance, and despite all the rules, I think LISAs are potentially good vehicles for the disciplined retirement saver.
The big boost of tax relief
But if you can’t join a workplace pension or you don’t qualify for a LISA there are other options for retirement saving. The main thing worth achieving is to find a tax-free wrapper for your savings. In general, there are two ways of doing that. The first is to save into a personal pension, self-invested personal pension (SIPP) or stakeholder pension where you’ll get tax relief on the money you pay in. However, the money you eventually draw out during retirement is then taxed as if it were earned income. The second way is to save into an Individual Savings Account (ISA). With an ISA, there’s no tax on your investment gains or when you draw money out of the account for retirement, or before. However, you get no tax relief on the money you pay into an ISA account.
Assuming you compound decent gains, I think an ISA account is a good way to save for retirement because, over decades of saving, your gains could be substantial, which means the tax relief will be working hard for you. I think the best way to target decent compounding returns is to invest in shares within your pension or ISA account. And that needn’t be difficult because you could do it by investing in simple, low-cost index tracker funds such as one that follows the returns of the FTSE 100 index.
