Changes to the State Pension could make it progressively less appealing over the coming years. A rising State Pension age is set to reduce the prospects of early retirement for a wide range of individuals, while an ageing population could put pressure on future increases in the payout.
As such, putting in place alternative arrangements for retirement may become of even greater importance. One of the most difficult aspects is making a start, but through investing even modest amounts on a regular basis it may be possible to overcome challenges associated with the state’s provision.
Making a start
Investing for retirement may never seem to be a priority. This may be true at various stages of life, and can mean that it is put off for many years. That’s understandable, since it is difficult to think as much as 50 years in advance. However, the reality is that starting to plan for retirement can be a relatively simple and hassle-free activity which provides a surprising amount of financial flexibility in the short run.
For example, there are a variety of apps available today which charge a small fee for automatically saving and investing money each month. A popular mobile app is Moneybox, which rounds up spending to the nearest pound and invests it in one of three tracker funds. Although the costs can be relatively high for smaller investors, it provides convenience and, in many cases, people may not even realise that they are planning for retirement.
Similarly, opening an ISA could be a sound means of overcoming the risks posed by the State Pension. Costs can be extremely low, with regular investing through aggregated orders helping to keep commission to a minimum. Investors are able to set up a monthly direct debit which can be for relatively modest amounts, with it regularly invested in shares or funds of their choosing.
Flexibility
Although pensions are not accessible until age 55, products such as a Stocks and Shares ISA or a Lifetime ISA may provide a surprising amount of flexibility before retirement. The former is accessible at any time, so can be used to pay for house repairs, a new car or whatever else comes along before retirement. The latter can be used to fund the purchase of a new home, while also offering a government bonus of up to £1,000 per year.
Therefore, an individual may be able to plan for retirement while also maintaining financial flexibility should other costs present themselves in the meantime. This could make it easier to start investing sooner, which in turn provides the longest period for compounding to impact on total returns. This could make a real difference to an individual’s financial freedom in older age.
For example, £1,000 invested for 20 years at a total return of 8% per annum (which is a realistic target within the stock market) could be worth £4,660, while the same amount invested at 8% for 40 years could be worth £21,724. As such, starting to invest today could make a real difference to whether an individual is able to overcome the challenges associated with the State Pension.
