Many people avoid thinking about retirement until it is just around the corner, but this could mean missing out on tens of thousands of pounds. Whether it is just five years away or 50 years away, we should all be saving for our later life income. Here are six things to try and avoid.
Auto-enrolment is now compulsory for workers earning at least £10,000 and aged 22 and over. If you decide to opt out of your company pension you could miss out on thousands of pounds when you come to retire. This is because when you contribute towards your workplace pension, your employer does too. And to top it off you’ll receive tax relief from the government. Currently, the minimum contribution that employees must make under auto-enrolment is 5% of their gross earnings. The tax relief applied to that is 20% for a basic-rate taxpayer and the employer contribution is 3%. The tax relief you receive depends on your individual circumstances and may be subject to change in the future. This is a great opportunity to get the ball rolling and secure a good income for later life.
Saving smaller amounts of money over a longer period of time is often much more effective than saving bigger amounts over a shorter period. This is because it gives compound interest time to work its magic. Research from the Money Advice Service shows that if someone saves £200 per month for 20 years, they’ll have around £75,000. Alternatively, if someone saves £100 per month for 40 years, they’ll have a pot size of around £123,000. In this example, you would be losing out on £48,000 despite having put away the same amount of money. This could be the equivalent of three years of income, or alternatively a sizeable inheritance to leave behind for your children and loved ones.
In the busy world we live in today people tend to put tasks on the back-burner, sometimes never getting around to doing them at all. However, when it comes to your retirement you cannot afford to forget. Regularly checking the performance of your pension fund is essential for making sure you’re on track to save enough. It may be that your circumstances have changed and you now have a different attitude to risk. Or it could be that your pension isn’t growing as well as you thought and you need to reconsider your investments. If you have more than one pension you could be paying several fees and charges so it might make financial sense to combine your pots. High charges and low growth could diminish your fund by thousands of pounds, so it is important that you monitor performance.
It’s important to remember that past performance is not a reliable indicator of future results.
The State Pension alone does not provide enough income to have a comfortable retirement. The full rate of the new State Pension is currently £203.85 per week (2023/24) and you need to meet certain criteria to receive this amount. You should treat this as extra income on top of your own provisions to boost what you have already saved. Aside from the low income offered by the state, the age at which you can access this money continues to increase in line with life expectancy. If you rely solely on the State Pension you may need to continue working past retirement age to top up your income.
Some people may rely on the equity in their home to look after them when they retire. According to the Equity Release Council the most popular reason for releasing equity is to boost their income once they have stopped working. However, this decision is not suitable for everyone and there are several pros and cons to consider.
80% of people who purchased an annuity from their current provider could have gotten a better deal on the open market, so it is well worth shopping around before making any important decisions. After all, annuities are typically irreversible, so once you have bought one it’ll be too late to take advantage of a better offer. What’s more, there could be a difference of up to 60% in annuity income between the best and worst quotes available. It’s fair to say that your pension savings won’t look after themselves. It is important that you take responsibility for your later life income and make adequate provisions to avoid being in financial difficulty in later life.
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