Many people reach retirement without really having thought about how much money they’ll need to live on and whether they’ll have enough to survive comfortably. It shouldn’t need saying, but the State Pension of £168.60 per week isn’t a lot — and it’s only likely to get worse as the years go by.
A survey earlier this year by the Nationwide Building Society found only 40% of the people polled aged 40-60 had a private pension. What’s more, estimates of likely cash shortfalls after retirement ranged from around £200 per month to close to £400, with a total shortfall over the course of the average retirement possibly running to £60,000, or more.
Do you have a private pension, or some other form of investment, that’s worth that much? Clearly, most of us need to be saving and investing for our retirement, and the sooner we start the better. It’s really quite surprising how many younger people simply don’t think about retirement as it’s so far away. Then suddenly, one day they turn 60 and it’s just around the corner.
My colleague Kevin Godbold has been looking at what portion of your annual salary you should be putting away for your retirement, and I want to offer a few thoughts on how to try to make up the shortfall estimated from the Nationwide survey.
Firstly, there’s no point whatsoever in saving money in a Cash ISA. Interest rates are pitiful and, today, you’d be lucky to get as much as 1.5% per year. As of June, inflation in the UK was running at 2% per year, and the typical Cash ISA interest won’t even keep up with that. What that means that a Cash ISA at that rate of interest will actually lose you money in real terms, and it’s no route to retirement wealth.
Stocks & shares
For me, it has to be investing in UK stocks, using a Stocks & Shares ISA, a Self Invested Personal Pension (SIPP), or a combination. I personally use both, having transferred two previous company pensions into SIPPs. Even with our new pensions freedoms, I still had to jump through a lot of hoops, but I got it done and now my pension investments are under my sole control.
The two investment vehicles have different benefits. With a Stocks & Shares ISA, you get no tax allowance on what you put in, but all your gains for the entire life of the investment are free of tax.
With a SIPP, on the other hand, you’ll get tax relief on your contributions — so they’ll be topped up by the appropriate amount of income tax. When you draw down a SIPP, you can take 25% of the total tax-free, and then pay tax on anything else you withdraw. And your personal allowance and potentially lower tax bands can help there too.
But where to put the money? Right now, dividend yields from the FTSE 100 stand at around 4.5%, and that alone is way better than a Cash ISA or a savings account. And I reckon targeting an average total annual return of around 6% is realistic. That would be enough to turn, say, £200 per month into more than £90,000 in 20 years.
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