To retire comfortably today, you need savings of at least £280,000 to £300,000, according to financial experts. Assuming you’re entitled to State Pension income (£168.60 per week), this should be enough to provide for a moderate lifestyle in retirement.
The problem is, however, that many people who are approaching retirement age have nowhere near that level of pension savings. For example, according to a recent study by insurance group SunLife, the average pension pot of those aged 50-59 in the UK is just £146,666.
Clearly, there’s a huge pension savings gap here. With the average pension pot of those in their 50s standing at less than £150k, many people are on track to hit retirement age with an insufficient level of savings to retire comfortably. This ultimately means that retirement may not be what they were expecting it to be.
So, what can you do if you’re in this position and need to make up a £130,000+ shortfall?
Up your savings
To my mind, the first thing to do if you’re approaching retirement and your pension savings are a little on the low side is aim to boost your monthly savings. Try to cut down on unnecessary expenses so that you can save more money and always pay yourself first so that saving is a priority.
Pocket government bonuses
Next, I’d suggest taking advantage of ‘tax relief’. This is essentially bonus money that the government hands out to those who are willing to save for retirement.
All you need to do to get your hands on tax relief bonuses is save into a pension account. This could be a workplace pension, a personal pension, or a Self-Invested Personal Pension (SIPP).
Basic-rate taxpayers are entitled to 20% tax relief meaning that if you put £400 into a pension, the government will add in another £100 for you. Put in £800, and this will be topped up to £1,000. This could really help you boost your pension savings.
Grow your money over time
Finally, get your money working for you. The best way to do this, assuming you have a long-term investment horizon (more than five years) is to invest in growth assets such as shares and funds. These are riskier than cash savings, but in the long run, they tend to produce much higher returns.
For example, according to this year’s Barclays Equity Gilt Study, UK stocks have delivered a return of around 4.9% per year above inflation (so around 7%-8% overall) since 1899, versus just 1.3% for bonds and 0.7% for cash. Can you afford to ignore that kind of return?
Doing a quick ‘back-of-the-envelope’ calculation, I calculate that if you saved £5,000 every year from the age of 50, picked up 20% tax relief from the government, and generated a return of 7.5% on your money every year through the stock market, by 65, you’d have an extra £163,000 to your name. Pension savings gap sorted.
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