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Saving for retirement

Your retirement: building a savings pot

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Your retirement should be something to look forward to, so it’s good to make sure you’ll have financial security for when you decide to stop working

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The state pension

The state pension is paid by the government and you’ll be able to claim this if you’ve made National Insurance (NI) contributions during the time you’ve been working. The state pension is split into the following:

Basic state pension:

You can get the basic state pension if you’re a man born before 6 April 1951 or a woman born before 6 April 1953 – if you were born after these dates you’ll have to claim for the new state pension (see below).

You’ll qualify for the full basic state pension if you’ve been making NI contributions for 30 years – either working and paying NI, getting NI credits as a result of unemployment, sickness, or being a parent/carer, or by paying voluntary contributions.

The full basic state pension will give you £125.95 each week. If you won’t be eligible for the full amount, there are ways to increase it or even receive more than the full amount.  

For example, you could pay voluntary contributions or you could defer claiming your state pension as this could increase your payments. For every five weeks you defer, the state pension increases by 1%. You don’t have to do anything to defer your pension as it will automatically be deferred until you claim it.

New state pension:

If you’re a man born on or after 6 April 1951 or a woman born on or after 6 April 1953, you’ll qualify for the new state pension.

To qualify you’ll usually need at least 10 years of NI contributions – though these don’t have to be in a row. The full amount you can get is £164.35, but this will depend on how many NI contributions you’ve made.

Additional state pension:

You’re only eligible for the additional state pension if you’re claiming for the basic state pension and reached state pension age before 6 April 2016. The amount you receive is automatically added to your basic state pension – you won’t need to make an extra claim.

Why it pays to save

Unfortunately, the state pension is unlikely to be enough to provide the income you need to maintain a comfortable standard of living once you’ve stopped working. So it’s a good idea to build up your own retirement savings pot throughout your working life.

When should I start saving for retirement?

The time to start saving for retirement will depend on you and your circumstances, but it’s a good idea to start as early as possible – ideally when you start earning. This gives you the chance to accumulate more in your savings pot, while if you start later in life you might find yourself playing catch-up.

The different ages of people who make savings accounts enquiries through MoneySuperMarket

MoneySuperMarket data showing the ages of those making savings accounts enquiries during July 2018.

How do I start saving for retirement?

When you decide to start saving, the two main options are contributing to a pension or opening an ISA.

Pensions are the most popular, and while you can contribute to them as soon as you start earning, you won’t be able to access the money until you reach the age of 55 – this makes it a good way to secure funds for your retirement.

ISAs are a more flexible way to put a retirement pot together as, depending on the ISA product you choose, you may be able to access the money before you retire.

Saving for retirement: pensions

Pensions offer tax relief on the money you pay in as well as your returns. There are two main types of pension – workplace and personal.

Workplace pensions + auto-enrolment

A workplace pension is a pension arranged by your employer. All employees aged between 22 and the state pension age who earn more than £10,000 a year should be offered one.

Most workplace pensions are defined contribution schemes where your employer chooses a pension provider and contributes to your fund as well as you. Most companies pay in between 3% and 10% of your annual salary each year.

Ideally, your total contributions should top this up to around 15% of your salary.

The amount paid out to you when you retire depends on how much you’ve paid in and how long you’ve been paying for, as well as how much profit has been made from the provider’s investments, and any fees the provider will deduct.

Some companies used to offer defined benefit schemes, where the amount you received in retirement would depend on how many years you worked for your employer and your salary. However, due to the expense, most are being phased out.

Personal pension

If you can’t get a workplace pension – for example, if you’re self-employed – you’ll have the option of applying for a personal pension. This means you’ll go directly to a provider that suits you and pay regular monthly payments or a lump sum for the provider to invest on your behalf.

The advantage of this is the provider will usually offer a range of investment funds, giving you more flexibility than a typical workplace scheme. The downside is you won’t be able to take advantage of employer contributions that come with workplace pensions.

If you want even more control over your investment you can opt for a self-invested personal pension (SIPP).

Transferring a pension

There are a number of reasons you may want or need to transfer your pension - such as if your current scheme is closing, if another scheme works out cheaper, or if you have several pensions you want to combine.

However, if you do want to transfer a pension, you should be aware that:

  • You may have to pay an exit penalty, and these can be over £1,000
  • You might also lose any guaranteed annuity rates – the rate your annuity payments are made at when you retire.

Cashing in your defined contribution pension

If you have a defined contribution pension at your workplace, you’ll have the following options for cashing in and setting up a retirement income:

  • Annuity – this is the only option that gives you a guaranteed regular income either for life or a set number of years.
  • Pension drawdown – pension drawdown is when your provider still invests your money when you retire, but you’ll be able to take out money from the pot whenever you want or need to – you can take up to 25% of it as a tax-free lump sum.
  • Cash in – you could cash in your pension if you need the money, or if a guaranteed future income isn’t the most convenient option (if you’re in poor health, for example). The first 25% is tax-free.
  • Lump sums – you might want to take out lump sums, where you’ll have flexibility in how much money you can take out each time, but your money won’t be reinvested. Again, for each withdrawal the first 25% is tax-free.

Saving for retirement: ISAs

An alternative option for building a retirement pot is to open an ISA. ISAs offer a tax-free way to save, and you can invest up to £20,000 in the current 2019/20 tax year.

There are several different types of ISA.

You can choose to pay in to a cash ISA, for example, and opt for either an easy access ISA where you can access you funds whenever you need to, or a fixed rate ISA where you tie up your funds for a set time.

Or you could consider investing in a stocks and shares ISA – but be aware this is an investment and the value of your investment and the income derived from it can go up as well as down - you may get back less than you originally invested.

Alternatively, you could think about a Lifetime ISA:

Lifetime ISAs

A Lifetime ISA is a type of ISA that lets you build up a long-term fund, generally for buying your first home or for retirement. You can pay in up to £4,000 a year, and the government will contribute 25% of what you’ve paid into the account too. Note that this £4,000 makes up part of your yearly £20,000 ISA allowance.

You won’t be able to take money out of the account until you reach 60 years old without paying a 25% charge – unless it’s for your first home. You also have to be over 18 and under 40 to open a Lifetime ISA.

Once you turn 50, you won’t be able to make any more payments in, and therefore you also won’t get the 25% bonus, but your savings will still earn interest.

It’s important to remember that Lifetime ISAs are not a pension equivalent, and you can benefit from tax relief on pension contributions as well as your ISA – read more with our guide to Lifetime ISAs.

Tips for maximising your retirement savings

There are a few things you should keep in mind if you want to help your retirement pot grow:

  1. Start early – the earlier you start putting money away, the more your investment can grow.
  2. Clear debt – while it’s not always easy, paying off your debt as soon as you can means you’ll free up more funds for your retirement savings pot.
  3. Prioritise your pension – there are a number of reasons to save, such as for a home or a car or even a holiday, and only you can decide what your priority is – but if you concentrate on your pension you can help yourself more in the long term.
  4. Set a goal – with a firm goal in mind, it might be easier motivating yourself to put money aside for the future.