It’s going to come one day. It might seem a long time off, but as long as you remain in good health, one day you’ll find yourself at the age when you will stop working and start taking your pension. If you don’t take action early enough in life, you’ll find it virtually impossible to catch up. When the time comes to retire, you could be left woefully short in the finance department.
The importance of thinking about taking action now
You need to think about taking action now. The first thing to understand in the process of deciding how to save for your retirement is what you are entitled to from the state. Be warned now; your entitlement won’t be enough on its own.
Recognising that the state pension alone is not enough
If you are in full-time employment and you are paying a full national insurance stamp, you will be entitled to the state pension. However, even if you contribute all your working life, on average you will only get something in the region of £160 per week. By the time you’ve taken care of any bills, such as rent, council tax, heating and electricity, telephone bills etc. there is not going to be much left, if anything at all.
How will the workplace pension affect your finances?
The UK government has already recognised the problem and has tried to head-off the massive pension gap the nation already faces (a £318 billion shortfall) by bringing in the workplace pension scheme whereby your employer contributes into your pension pot. If you are in full-time employment you are entitled to this in addition to the state pension. It’s a welcome addition, but it’s still not likely to be enough to afford you a comfortable standard of living in later life.
A rough estimate of what the new workplace pension could be worth at retirement can be found in this article on the money page of the Guardian website. In short it surmises:
- Current aged 25 year-old adult – £91,100
- Current aged 35 year-old adult – £82,800
- Current aged 45 year-old adult – £54,600
Although the figures might (based on information from NEST – National Employment Savings Trust), seem attractive on the surface, you have to bear inflation in mind. Those sums of money will be worth a lot less in real terms a few years from now.
How you can expand your pension pot
The best way many people see of expanding their pension pots is to take out a private pension of some sort or other. Many people use investment vehicles like a Lifetime ISA or a stocks and shares ISA.
Pensions per se, offer the best way of saving for your retirement; but they do have a common fault, and it’s a fault that is designed in on purpose. You can’t access the money if you need it, until you’re 55 or older. To be fair, this is to safeguard your retirement lump sum, but in the real world, people are constantly facing financial challenges and need access to their savings. This is where something like a stocks and share ISA comes into its own right.
How to get the best interest rate on your investment
Far too many people put their money into ordinary savings accounts or cash ISAs. In terms of saving towards your retirement, this sort of investment simply doesn’t cut the mustard. The interest rates they offer are far too low; significantly lower than inflation, so you are losing money in real terms.
People make the mistake of going for security. You can only get it (to a degree) by sacrificing lost earnings.
An investment in stocks and shares is a risk. Investments can go down as well as up. However, the risk can be tailored to what finance professionals refer to as your appetite for risk. Short term investments are riskier than long term, it is true. You may have to withdraw funds when the stock market is at a low.
The stock market always recovers. Sometimes it might take a couple of years or so, but it always bounces back and proceeds to grow even higher, which is why if you invest in the long term, you are more likely to avoid this potential pitfall. If your aim is to accrue cash for your retirement, it is indeed likely to be a longer term proposition.
Not only will your investment earn significantly more interest in a stocks and share ISA, but if you have to, you can always access some of your cash when you need it, without penalty. It has to be a serious vehicle for consideration.