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Retirement can be wonderful and worth looking forward to – if you have planned for it. One of the best ways to take charge of and ensure your financial security for when you stop working is by setting up a retirement savings account.
A retirement savings account can supplement your pension (or be a good alternative if you do not have one) allowing you to live quite comfortably after retiring.
Here are a few key facts about this type of account.
Retirement savings account overview
A retirement savings account is an account that you put money into monthly or annually to be spent after retiring. This type of account is provided by a bank, building society, credit union or life insurance company.
You can talk to any of these institutions to find out about the retirement savings accounts they offer and their terms.
Generally, a retirement savings account is run similarly to a regular savings account. However, since the account’s purpose is to help you save for retirement, it earns a relatively higher level of interest.
Usually, you’re only able to withdraw from the account if you meet a specific condition of release or if you’ve attained a certain age agreed upon with the provider.
You can earn interest on your retirement savings account tax free. However, this is dependent on you not exceeding your personal allowances on savings.
For example, if you are a basic rate taxpayer, you can earn up to £1,000 in interest tax free. This is your personal savings allowance.
Additionally, if your other income is less than £17,500, you can earn up to £5,000 in interest from your retirement savings without having to pay any tax on it. This is referred to as your starting rate for savings. The more you earn from your other income, however, the lower your starting rate will be.
More information on these allowances is available on the gov.uk website.
When should you open a retirement savings account?
Your personal circumstances will determine the best time to open a retirement savings account. But ideally, aim to do it as soon as possible.
You can, for example, open one as soon you start earning. This will allow more time for the compound growth of your money, giving you a chance to accumulate more. The more you will have accumulated, the more comfortable your retirement is likely to be.
On the other hand, if you find that you are running short of time, for example, if you are already in your 50s and don’t have any retirement savings plan, remember that it is never too late. The key is to start saving now.
Yes, you might have to play catch-up if you start saving later in life. But even a few quid tucked away in a retirement savings account every month and earning you interest is better than nothing.
How much should you save for retirement?
The actual amount you will need to have a comfortable retirement will be dependent on your personal circumstances. This includes whether you’ve paid off significant expenses like your mortgage and student loans and whether you have dependants.
Of primary importance is being honest about how you want to live after retirement and how much this will cost. You can then make an educated guess as to how much you ought to save.
A popular way to estimate how much you will need in retirement is the ‘70% rule’. According to this rule, you’ll need 70% of your current working income to maintain the same lifestyle in retirement.
So, if by the time of your retirement your salary is £40,000, you would need to have a retirement income of around £28,000 a year.
First, work out how much of this will be provided by your retirement pension. You can then calculate how much you’ll need to put into a retirement savings account to achieve the balance.
Needless to say, if you’re going to be globe-trotting or buying that beach house you always dreamed of, you might need 100% of your annual income – or even more!
On the other hand, if you plan to settle down to a quiet life in the countryside where your expenses are low, you might not even need as much as 70%.
You might also not need this amount if you already have other sources of income, such as rental income from property or even a side business that you are running from home.
If you need help calculating how much much you will need to retire and therefore how much you will need to save, you can try using the Money Advice Service’s pension calculator.
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