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What Are Your Options To Save Money For Retirement?
On Monday, September 13, 2021 -
We’ve said it before and we’ll say it again: even if retirement seems like it’s a lifetime away, it’ll be right around the corner before you know it. And, it’s key that you’ve planned for it plenty ahead of time, so that when you do give up work, you can live out your golden years feeling secure about your finances. But, when you’re thinking about planning for your retirement, what are your options? Let’s find out.
Remember, everything we’ve written in this article is simply information about some of the different retirement savings options available. It isn’t intended as advice on what you should do in your individual situation. If you need help with this, please seek the assistance of an independent financial advisor!
Your state pension
State pension is paid by the government. So, it’s not really a way to save for your retirement, but it’s still important to bear in mind. Whether you receive state pension or not, and how much you receive, depends on how many years’ National Insurance (NI) contributions you’ve made over the course of your working life. To receive any state pension at all, you will need to have at least 10 years of NI contributions. And, to receive the full amount, you’ll need to have 35 qualifying years of NI contributions. If you have more years of NI contributions than you need, you’ll still only receive the full amount – no more.
You won’t receive your state pension automatically when you become eligible for it, you will have to claim for it. But, the government will write to you a couple of months before you become eligible to let you know and remind you to get your claim in.
The state pension is designed to be enough money to cover most of your essential living costs. But, it may not stretch to them all, or allow you to do many fun things with your retirement years. So, it’s a good idea to save up for your retirement privately, too.
Workplace pensions
If you work, then by law, your employer must provide a workplace pension scheme that you’re automatically enrolled into, unless you opt out or don’t meet the workplace pension criteria. If you’ve been automatically enrolled in your employer’s pension scheme, then they will have written to you to let you know and provide you with details of the scheme. If you’re not eligible to be enrolled automatically, you can still join the scheme voluntarily, but your employer may not have the same obligations to contribute to your pension as they would if you were automatically enrolled.
That’s right – with workplace pensions, both your employer and the government also chip in towards your pension. Under current workplace pension scheme rules, Individual employees – like you or me – pay in a minimum of 5% of our income, and employers must pay in at least 3%. Many pay more depending on the rules of their chosen scheme. The government will then also chip in, in the form of tax relief. There is a bit more to it, and also earning thresholds to consider - you can read more about these in our complete guide to workplace pensions.
If you leave your job, then you will take the pension you’ve saved with you, although neither you nor your employer will pay into it automatically anymore. If you move jobs a few times during your career then you can end up with a few different pension pots. Some people choose to consolidate them into one, bigger pot, and others leave them as they are. It’s your choice!
Private pensions
As well as state pension, a workplace pension and other savings, you may also want to save into a separate, private pension fund. There are two ways you can do this: stakeholder pensions, and self-invested personal pensions (SIPPs).
Stakeholder pensions
Stakeholder pensions are a type of pension that you may be offered as a workplace pension, but you can also set one up for yourself if you’re not eligible for a workplace pension, or simply want a separate pension fund of your own. The money you pay in is invested by the pension provider in stocks, shares and funds according to their investment strategy. This makes stakeholder pensions a good option if you don’t know much about investing, or don’t have much experience of it, as your pension provider takes care of everything for you. Some pension providers do allow you to have a bit of a say in where they invest your money, by letting you select whether you want your money invested according to a low or high risk investment strategy, or somewhere in between. And, if ethics and sustainability are important to you, there may be options for you to choose to invest particularly in companies focused on those things, too. They’ll adjust where and how your money is invested based on what you choose.
Stakeholder pensions offered by providers must meet certain standards that are set out by the government. These include a legal limit on charges, charge-free transfers, being able to stop and start your contributions at any time without penalty, the ability to make relatively low minimum monthly contributions, and offering a default investment fund that your money will be put into if you don’t want to choose how it gets invested.
Self-invested personal pensions
Self-invested personal pensions (SIPPs) are pretty much what their name suggests. It’s a personal pension, except this time you’re in control of where the money you pay in gets invested. And, while choosing exactly whose companies you want to buy shares of might sound appealing, it’s not something to jump into lightly.
Pensions, like all capital investments, come with a risk that you may lose your money. When you take out a stakeholder pension, you’re mitigating some – but not all – of this risk by putting your money in the hands of extremely experienced, expert fund managers. These people have spent years honing their skills, learning how to read market trends and finding the perfect moment to buy and sell shares to make sure you get back what you expect from your investment. With a SIPP, though, the risk you take is all on you. So, before you get a SIPP, it’s crucial that you’re either a knowledgeable and experienced investor yourself, or you’re working with an independent, expert financial advisor who knows what they’re doing and has a solid track record of making good investment decisions for their clients.
Lifetime ISAs
The Lifetime ISA – or LISA, as it’s fondly known – is another tax free option for you to save up for your retirement. You can open one any time between your 18th birthday and your 40th, and when you save up to £4,000 a year in a LISA, the government will top up your savings by 25%. But, you can only pay into a LISA until your 50th birthday, after which anything you have saved will earn interest but won’t keep being topped up by the government each year. And , you won’t be able to take money out of your LISA until after you turn 60, unless you’re withdrawing it to buy your first home. If you take money out of your LISA for any other reason before your 60th birthday, you’ll have to pay a 25% charge.
It’s important to remember, though, that while a LISA can be a good place to save money you intend to use for your retirement, it isn’t a pension. This means that although you won’t pay tax on savings kept in a LISA, it may not be the most efficient way to save for your retirement compared to some other options where you receive tax relief. Make sure you run the numbers and take advice if you need to, to make sure you put your retirement savings where you’ll get the most out of them.
Top tips for saving for retirement
- Set a goal - Have a think about the type of lifestyle you want to be able to have when you retire, and how much money you’ll need to pay for that (we’ve written a guide that can help!). From there, use a pension calculator to help you work out how much you need to save each month, and how this changes depending when you start.
- Start saving as early as you can - It’s easy to think of your retirement as a problem for another day when you’re young and have many years working ahead of you. But, the sooner you start saving towards your pension, the less you’ll need to save each month throughout your working life to hit your pension savings goal. You’ll also have your pension savings invested for longer, which gives them more time to grow!
- Make your pension a priority – There will always be a reason to spend your money on something else, instead of saving it in your pension. But, if you’re serious about hitting your retirement savings goal, then it has to be more important to you than most of that other stuff. It might be tough going now when you can’t buy a new car as soon as you’d like without cutting your pension contributions, but future you will thank you – trust us!
