When you first start investing, the saying, ‘The first pound works the hardest’ gets used a lot.
This is due to the effects of compound interest growing your capital exponentially year on year. This in turn supports that the earlier you start saving into a pension, the better chance you have at retiring with the wealth you desire.
But does this mean that you have left it too late if you start saving in your 50s or 60s?
First is understanding your current position. What have you got right now to go towards retirement? And more importantly, understanding what more you potentially need to retire.
Saying you wish to retire at 60, without really understanding how this will work financially is just asking for trouble. As the saying goes “a goal without a plan is just a wish”.
When you work with a financial planner, we look to create a plan with you to help you understand how much you need to reach your personal goal. Retirement is different for everyone, and there isn’t a one shoe fits all approach. Some like to do a ‘hard retirement’ and stop working completely at a set date, others prefer a more transitional approach. Understanding what you want to achieve and being flexible enough to understand that those goals may change or develop, is why ongoing advice is so important.
Then knowing what you would like to do in retirement is key. At Magenta, we help you to discuss this and explore your lifestyle whilst using our experience of how much you would need saved to provide comfort during these years.
The life expectancy calculator from the Office for National Statistics predicts that a person aged 65 today will live on an average a further 19.7 years for male’s and 22.0 years for females, projected to increase to 24 years! With that in mind, starting in your 40s or 50s for an average of 40 investment years, gives us a healthy amount of time to work with.
Why a pension?
A pension is a highly tax-efficient way of saving for retirement. It is in the governments best interest to make pensions as attractive as possible, because by encouraging those in employment to save for their own future, this leaves them with less who rely on the state. As our aging population increases this is evermore important for future generations.
Contributions to a pension have an automatic uplift of 20% on anything you add. If you are employed, you can also ask your employer to match any contributions you make. In the 2022/23 tax year, you can get tax relief on private pension contributions worth up to 100% of your annual earnings or £40,000, whichever is lower.
A benefit of pensions is that they are not subject to inheritance tax. Meaning that your pension can be passed on to children and grandchildren without tax.
When considering a good financial plan, we typically recommend a balance between pension savings and ISA, to make best use of the tax advantages brought about by both products. Everyone’s retirement is different and having multiple solutions, with difference access opportunities, enables increased flexibility with your income.
If you are a high earner and saving large sums each month, then a pension is an ideal place for you to put your pension to ensure you benefit from the additional tax relief for high earners.
You can claim an additional 20%/25% in your tax return on the contributions made, depending on whether you are higher/additional taxpayer.
Pension contributions can reduce your earned income for personal allowance purposes. After you earn £100,000, your allowance is reduced by £1 for every £2 you earn over this. Contributing to your pension, reduces the salary used against this, meaning you can earn back some tax-free income!
What do I do if I already have a pension?
Many of us have started jobs and left without really knowing what happened to the pension we have accrued with that company. It is a good idea to look back through any documentation you can find to ensure that this money isn’t lost, after all you have already earnt it!
According to the association of British insurers, there is approximately £19.4 billion of lost pensions in the UK.
If you think you may have a ‘paid up’ or old pension with a previous employment, you can use the government pension tracing service: Find pension contact details – GOV.UK (www.gov.uk)
Once you have all your pensions accounted for, it is then a case of which one do you contribute to, and how much do you need to contribute.
This is where Magenta can help. We can analyse your pensions for you, to allow us to discuss the best possible options that are available for you to reach your goals!
For more information on this, see a recent blog we posted on this very subject: Should I combine my pensions?
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