5 Ways to Save For Retirement
How much money do you need to save for retirement? That depends on when you start saving, but the earlier, the better. If you're undecided about saving for retirement in your 20s, you might be swayed by the fact that the more you put in now, the more you'll enjoy your later years.
Anything you save for retirement is in addition to your state pension from the state. The full 2018 to 2019 state pension amount is £164.35 a week, with the state pension age of 63 for women and age 65 for men.
1. Workplace Pension
A pension fund is the most popular way to save for retirement. A workplace pension, also called an occupational or company pension, is arranged by your employer. From 2018, all employers aged 22 and over earning more than £10,000 a year should be offered a workplace pension, with the employer required to contribute at least 3 per cent of your salary. Try to top up your employer's contribution to around 15 per cent of your salary to make sure you have enough saved.
Visit The Money Advice Service website to find out how much your pension pot could be worth. Enter your date of birth, gender, anticipated retirement age and current gross salary to generate your target retirement income. If you’re already paying into a pension pot, you can provide details of your gross contributions and your employer’s contributions to find out what your likely retirement income will be.
According to actuaries, to get a pension of £20,000 per year upon retirement, a 25-year-old on an average salary of £26,364 has to put £246 per month into a pension pot.
2. Personal Pension
You can take out a personal pension as well as a workplace pension and pay either a lump sum or regular monthly payments to a pension provider to invest the money on your behalf.
A personal pension offers greater flexibility and investment freedom than does a typical workplace pension. A self-invested personal pension (SIPP) provides the widest investment options.
Whether you choose a workplace or personal pension, you also benefit from tax relief (a reduction in tax liability) on the first £40,000. You get the tax relief automatically if your employer takes workplace pension contributions out of your pay before deducting income tax or if you pay income tax at the basic rate of 20 per cent (your employer claims it as tax relief and adds it to your pension pot). This means you get £20 from the state for every £80 paid into your pension.
If your personal pension scheme is not set up for automatic tax relief, you claim tax relief via a Self Assessment tax return.
3. Cash ISA
A more flexible way of saving than using a workplace pension is to invest in an Individual Savings Account (ISA). In the 2018 to 2019 tax year, the maximum you can save in ISAs is £20,000. Three types of ISA are cash ISA, stocks and shares ISA and innovative finance ISA, and you can pay money into one of each type of ISA, each tax year.
A cash ISA is an account that pays tax-free interest, up to an annual limit, as opposed to savings accounts on which you pay tax, such as fixed rate bonds. This means basic-rate tax payers save 20 per cent on savings interest, and higher-rate tax payers (earning between £45,001 and £150,000) save 40 per cent.
4. Stocks and Shares ISA
Stocks and shares ISAs are free from both income tax and capital gains tax (CGT). Unlike a cash ISA, a stocks and shares ISA lets you choose how your money is invested from a wide range of investment options.
You can transfer money invested in the current year or in previous tax years between cash ISAs and stocks and shares ISAs without losing the tax-free status, provided you do not actually withdraw the money.
5. Innovative Finance ISA
Innovative finance ISAs, introduced in April 2016, invest in peer-to-peer lending. In other words, you lend out your own money to individuals or businesses who pay the money back over time, with interest. Returns from this type of ISA are also tax-free. However, unlike cash ISAs, money lent under an innovative finance ISA is not protected by the Financial Services Compensation Scheme (FSCS), which makes it a riskier option.
Whatever retirement savings strategies appeal to you the most, it's sensible to seek the advice of an independent financial adviser who specialises in retirement planning.
- MoneySuperMarket: Saving for Retirement
- Department for Work and Pensions: Workplace Pensions
- GOV.UK: Personal Pensions
- GOV.UK: Individual Savings Accounts
- MoneySuperMarket: Cash ISA
- MoneySuperMarket: Stocks & Shares ISAs
- BBC: The new Innovative Finance Isa: How Risky Will it be?
- GOV.UK: Your State Pension Explained
- The Money Advice Service: Pension Calculator
- BBC News: How to Get a Pension of £20,000 by the Time You Retire
- GOV.UK: Tax on Your Private Pension Contributions