About Time: You Started Saving for Retirement NowBy Angelica Malin
The new state pension is currently £159.55 a week – a paltry figure when you think about what your lifestyle costs. And who’s to say your outgoings will have significantly changed by the time you reach the age of 67? You’ll still need to pay your utility bills, run a vehicle, buy food and clothing, cover the cost of hobbies, exercise and socialising, and if you’re renting, you’ll still need to pay your landlord. Even those who own their home may not have paid off their mortgage by the time they retire, meaning that monthly mortgage payments will still be something to cover.
So as you can see – retirement isn’t exactly a cheap affair. If you couldn’t pay for your current lifestyle on £159.55, you probably won’t be able to in your 60s either.
Unfortunately, most of us aren’t really thinking about saving for retirement in our younger years. But if you don’t start saving until you’re aged 50, for example, you can expect to need to tuck away approximately £630 a month in order to retire comfortably.
Of course, it’s hard enough to get out of debt, get on the property ladder and save for an expensive car repair – so being told it’s ‘common sense’ to save for retirement now only makes it worse.
So what can you do? Well, you can do the following things.
Start saving something
According to Which?, the average households spend a little under £2,200 in retirement – approximately £26,000 a year. This covers all the household essentials as well as one or two luxurious, such as hobbies, going out for dinner and a regular European holiday.
But if you have a slightly more luxurious retirement in mind – perhaps long haul holidays and a new car every five years – you can expect to spend approximately £40,000 a year.
Bear in mind that some portion of your retirement is likely to be spent needing care, too. Care is expensive, and while some people have no choice but to sell their home to pay for their care, it isn’t a good option for everyone – a more generous pension pot is often preferable.
So, if you’re happy to live the average lifestyle in retirement, at £26,000 a year, you’ll need approximately £210,000 in your defined contribution pension pot by the time you retire. This means you’ll need to save every month to reach your goal. A couple who starts saving at the following age should set aside this amount:
- Aged 20 – save £131 a month
- Aged 30 – save £191 a month
- Aged 40 – save £338 a month
- Aged 50 – save £633 a month
Of course, you simply may not have this kind of money floating around right now. So the best thing you can do is to save what you can. Even £100 here and there, and a larger payment if you inherit some money or get a bonus, could really help. If you find your circumstances changing and discover that you can regularly save for your retirement, talk to a financial advisor and start tucking away significant sums in line with the figures above.
Where to save
You have a number of options when it comes to saving whatever money you can. You can invest in stocks and shares, pay more into your employment pension, or simply put it into a savings account. You should be looking for the lowest risk, highest reward method of saving (acknowledging the fact it’s a careful balance, and that there will be an inherent level of risk if you want high reward), remembering to ‘diversify your portfolio’ (not put all your eggs in one basket) as much as possible.
However, something to seriously consider is saving for your retirement using a lifetime ISA. A lifetime ISA (LISA) allows you to pay into £4,000 a year into it, with the government topping it up by £1,000 a year until you’re 50 years old. You can access the funds on your 60th birthday – tax free – to be used in your retirement. There are terms and conditions attached to this, but a 25% ‘bonus’ essentially works as an extraordinary rate of interest, in addition to the other interest you accrue – so it’s well worth considering.
Check your National Insurance Contributions
You’ll need to have paid National Insurance contributions for 35 years over your working life to qualify for the full state pension. You can check your national insurance record online, but don’t worry if you’ve not been paying contributions for enough years – you can pay voluntary contributions to fill any gaps you have in your payment history. This is particularly important to check if you’re self employed.
Check you’re enrolled in a workplace pension
If you’re at least 22 years old (but not yet at state pension age), earning at least £10,000 a year and working under an employment contract, you’ll be eligible for automatic enrolment in your workplace pension. This means that – provided your employer offers a pension scheme – pension contributions will be automatically deducted from your salary before you’re taxed on it.
Your employer will contribute a figure towards this pension pot too, topping it up a bit – something that’s known as a defined contribution plan. Your employer will invest the money in stocks and shares with the aim of growing it before you retire, and at the age of 55, you’ll be able to access it. The amount that’s in the pot depends on how long you save for, what you pay into the pot and how much your employer pays in too, among other factors.
If you’re asked whether you’d like to opt out of your pension scheme, think very carefully: rejecting a workplace pension scheme is essentially like turning down a pay rise. You should only reject it if you absolutely need every single penny of your monthly pay cheque right now.
So, can you see how important it is to start saving for your retirement now?