It’s a shocking fact that millions in the UK could be facing a serious cash shortfall in their retirement. In fact, many who have no company pensions and who have made no private preparations could find themselves struggling to live on a basic State Pension of just £8,546 per year. And you only get that much if you have made 35 years of qualifying National Insurance contributions.
But it’s never too late to improve your situation, so here are five things you could do right away that could help you to a more comfortable old age.
Increase your pension contributions
This might sound like an obvious suggestion, but you might say you don’t have any spare cash to contribute to your pension right now. But think of it this way: How many luxuries do you enjoy today which might just leave you short of necessities when you’re older?
Do you spend much going out? Do you have the most expensive multi-channel TV subscription? How about your car — could you save a bit by going for a more economical one, or perhaps using it less? Maybe walk more, or even get a bicycle and improve your fitness into the bargain?
A big mistake I hear many people make is what I think of as doing it the wrong way round. They add up what they currently spend every month and then conclude that there isn’t enough left for their pensions or investments.
How about, instead, starting by adding up all the things you should be doing, and then only spend the cash that’s left on other things. And perhaps do things like allocating all your future pay rises to your pension investments, so you’ll notice it less.
If you have a company pension you can usually make extra contributions to that (which has extra benefits if your employer matches any extra contributions, even only partly), but there are other ways too.
Start a SIPP
Another way is to open a Self-Invested Personal Pension, or SIPP. Most financial providers offer them these days and the annual charges are usually low. A SIPP falls under your standard annual pension allowance, which means you can invest up to £40,000 in the current tax year in total and it’s topped up by the tax you’d normally pay on it as income at source. The allowance is actually reduced for those who earn more than £150,000 per year, but if that includes you then you won’t be needing my suggestions.
The lifetime limit currently stands at £1.03m, though that’s unlikely to be much of a handicap for most of us.
Of course, though you can contribute tax free to a SIPP, all of your eventual pension income is taxable (after a 25% portion that you can take tax free). But you do still have your annual income tax allowance, and you could well be in a lower tax bracket after retirement.
And with a SIPP, you’re in total control and you get to decide where to invest your cash.
Take control of existing pensions
If you want a SIPP and to be able to manage your own investments yourself, you might not necessarily have to start a new one from nothing. You might well have some other pension funds, typically from past employment, and with the change in law a few years ago they can mostly be transferred to a SIPP. So you can kick it off with a decent bunch of cash right from the start.
Some old-style pensions which have protected benefits are still not completely free, but there can be circumstances in which you can get those transferred too.
And before you worry about contribution limits, a transfer doesn’t count against what you’re allowed to invest in a pension each year — the limit only applies to new money.
Again, once any other pension cash has been consolidated into your own SIPP, you’re free to invest the money however you like.
Start an ISA
Don’t forget that other tax-efficient annual investment wrapper, the ISA. The tax rules differ from those of a SIPP in that you don’t get any tax relief on the cash you put in. But you also don’t pay any tax on any profits you’ve made when you take cash out. So even if you manage to hit the occasional ten-bagger growth stock, the gains will be tax free.
There’s a totally separate annual allowance too, currently standing at £20,000. So if you have the money to invest you can even get a total allowance of up to £60,000 per year by combining a SIPP with an ISA.
And, if you qualify for it, you could even use up to £4,000 of your ISA allowance on a Lifetime ISA (LISA) and have the government top it up with an extra £1,000. You can read more details of LISA rules here.
Invest in shares
But the final decision for any self-managed investment, whether held in a SIPP or an ISA (or just in a plain investment account), is what to invest in.
With cash interest rates so low, I reckon a cash ISA is a complete waste of time — there’s just nobody offering enough to make it worthwhile. And in any case, investing in shares has way outperformed cash in a savings account for a century and more. In fact, one of my favourite statistics is that, according to Barclays‘ annual Equity-Gilt study, £100 invested in UK shares in 1945 would have grown to a massive £179,000 if you’d reinvested all your dividends.
Pension investments should be approached with a long-term perspective, and these days I overwhelmingly prefer solid blue-chip stocks that pay good dividends. If you can put together a portfolio of high-yielding shares, where dividends are well covered by earnings, and are lifted progressively every year, you could have the makings of a very nice retirement nest-egg. And you don’t have to look much beyond the FTSE 100‘s list of biggest companies to find candidates.
