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The richer retirement checklist! 3 ways to turbocharge savings for old age

With people generally living longer and longer, saving for retirement is very important. Yet only a quarter of the self-employed actively save into a pension and far too many employed people rely on their workplace pension to do the job for them.

I would advise being proactive and managing a self-invested personal pension (SIPP). It gives you more control over your investments, level of risk, costs and has certain tax advantages.

With the self-employed being urged to save from as little as £2.50 per day, it is clear that saving for retirement needn’t necessarily involve massive sacrifice of your current lifestyle. The downside of not taking control of your pension is that you would have to rely on the State Pension and employer workplace pensions for those in a job.

Be tax-efficient

Just like other pensions, investments in SIPPs grow free from income tax and capital gains tax. You also get tax relief on your pension contributions. Any money you invest in your SIPP will be topped up by 20% by the taxman, and higher or additional-rate taxpayers can claim back a further 20% or 25% respectively.

What this means in practice is that as a basic rate taxpayer, if you put aside £80, the government puts in £20. Over the course of just one year, £960 from you balloons to £1,200 overall and that excludes any dividends or growth you might get or achieve from your investments.

Start as early as possible

It is never too late to start contributing to a SIPP, but it is always best to start as early as possible. When aged 20, for a couple with no pensions already to reach £210,000 in retirement they need only set aside £131 per month. At 30 years old, it rises to £198, at 40 to £338 and at 50 to £633.

Time is one of the most essential elements to creating a portfolio of investments and savings that can help you retire richer. Apart from anything else, it gives you more time to benefit from interest and dividend payments that can accumulate into a large sum over many years. 

Harness the power of dividends

I am an advocate for the wealth-creating power of dividends. I would encourage anyone seeking to turbocharge their savings for old age to put money into investments that pay a dividend and that can take the form of using a fund manager, investing in tracker funders, investment trusts or in individual shares.

This is because dividends, on the one hand, show a company is profitable and reward shareholders ,which is a positive sign. The other aspect to it is the potentially huge wealth-generating potential from compounding, something that Albert Einstein called “the eight wonder of the world.

Compound interest, put simply, is interest on interest and it can help an investment grow at a faster rate. And the value of this compounding increases over time, meaning dividends have a significant ability to turbocharge retirement savings. 

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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.