Retirement may seem a long way off – but there are some key things you should now consider to help you plan for when you get there:
The answers to these questions will be very specific to you. Everyone has different personal and financial considerations, and different needs in retirement. Remember that the decisions you make today, and over the rest of your working life, determine how financially well off you'll be when you retire.
When should you start saving for retirement?
The basic answer to this question is "start as early as you can". You only have a limited time between now and your retirement in which to save – and the later you leave it the more you'll have to save to afford the pension you'd like.
Starting early allows you to invest relatively small amounts each month and let them grow – building up the value of your savings over a longer time means you are potentially maximising capital growth on those savings. We can illustrate this with a chart, which shows the future value of contributions paid by three investors. Each investor has paid £150 each month into their pension scheme until they were aged 60. Anne started when she was 50, Bill started when he was 40 and Claire started when she was 30.
Claire started paying contributions (of £150 a month) at a younger age, and has paid one and a half times the total level of contributions of Bill, and three times as much as Anne. But the effect of investment adding to the pot makes these differences even greater.
Assuming investment growth of 6% a year (net of charges) for all periods, the chart shows that Anne's contributions paid over a 10 year period would have grown to around £24,490. Claire's investment, having been made over 30 years, is worth almost six times as much.
Note: The assumed investment rate of 6% may not be achieved in practice, so the actual outcome is likely to differ from the figures shown by a greater or lesser extent. The value of investments can go down as well as up and you may get back less than you put in. Past performance is not necessarily a guide to future performance. These calculations are for illustrative purposes only.
Tax concessions are not guaranteed and may change at any time; their value will depend on your individual circumstances. You should be aware that taxation legislation is liable to change in the future. References to taxation are based on Deutsche Asset Management's assessment of the current Inland Revenue legislation as at the date of this release.
Source: Deutsche Asset Management
How much should you contribute?
Only you can decide what size contributions you can afford to make. The amount you pay may well change over the course of your life, as different spending priorities come into play. You need to balance all your financial commitments with the need to save adequately for your retirement.
However the more you contribute towards your retirement, the bigger the pension you can expect at the end of the day. For example:
- If you make a contribution of 5% of your salary each month into a pension scheme for 30 years, you could expect a pension that is around 25% bigger than if you had contributed 4% of your salary over the same period.
- So even a one percentage point difference in the amount you save each month can make a big difference to your future retirement income.
- If you earn £20,000 a year (before tax), these additional one percentage point contributions will cost you less than £15 per month from your take home pay (based on current tax rates).
Note: This example assumes investment returns of 6% pa. This rate is not guaranteed. Different contribution rates and/or time periods will produce different results. Tax rates and the tax treatment of pensions and investments may change in the future.
If your time horizon is shorter – because you have less than 30 years until you expect to retire – contributing as much as you can is even more important. With fewer years to retirement there is less time available to let your savings accumulate.
Where should you invest?
The money paid into your pension scheme will generate investment earnings over the years to your retirement. How well your money is invested can be the difference between having enough or falling short.
How much your money grows will depend largely on what type of funds you have invested in. You will probably have a choice of funds within your scheme – so you should firstly check in your Scheme Booklet or with your employer to find out what your options are. Or you can contact us to find out.
Choosing the right mix of investments is a personal decision, and one that will depend a number of factors, including your time horizon and your tolerance towards taking risk. You'll need to keep your investment choices under review as you progress through your working life, as changes in your financial or personal circumstances may affect your decision.
Click here for more information about investing for retirement.
Aberdeen Asset Management Life & Pensions Limited does not provide advice on the suitability or otherwise of specific investment transactions. This website provides only general information. In making decisions about retirement planning and the best approach to investing your retirement savings you should seek independent financial advice.
The views expressed should not be construed as advice to either buy, retain or sell a particular investment and are those of Deutsche Life as at the date of publication.