Receiving your pension the moment you decide to retire is an important milestone in your lifetime. And to do that you need to plan for it as soon as possible, because the longer you save the better chances you have for a comfortable retirement.
Most people don’t understand how important saving for a pension is as they confuse the quality of it to a savings account. Products such as savings account and ISA’s are not as suited as saving in a pension pot for your retirement.
- Your pension savings are usually reinvested over a longer period of time, meaning that the value of your pot could grow even more - but also not grow at all since investments go up and down depending on the economy.
- The typical annual allowance to save in a pension is £40,000 vs an ISA which is £20,000
- Workplace pensions receive employer contributions and personal pensions receive tax top ups from the Government, thus reducing the amounts you may need to contribute
Even though it is important that you start as soon as possible to plan your retirement and take control of your finances, it is also never too late to save in a pension pot. Here’s what you can do at 30, 40, and 50 to help give yourself the retirement you deserve.
What you can do at 30 years old
You’re probably at a stage in your life where you’re more stable financially. You have a stable job, you have more opportunities to get a job promotion or a raise and therefore more opportunities to grow your wealth.
You’re also probably in a relationship or with a young family. Your expenses are relatively higher than before, however they are still manageable. You’re also probably looking at buying a house.
At this point in your life is when you should start seriously planning and saving for your financial future.
Take advantage of compound interest
Compound interest is a way of increasing your savings by earning ‘interest-on-interest’.
For example, let’s say you have £10,000 in your pension in January 2022 and the interest you can earn in the first year is 10%, which is £1,000. This interest is added to your overall pension and therefore the following year in January 2023, you now have £11,000.
In 2023, assuming you still earn an interest of 10%, you will now earn this interest on a pension value of £11,000 taking your total pension at the end of 2023 to £12,100.
In 2 years you would have earned a total of £2,100 on your initial pension amount of £10,000.
In 5 years you would have earned £6,100 on your initial pension amount of £10,000.
Assuming you wish to retire 25 years from now at the age of 57 and the interest you earn stays the same, you would end up with a pension value of nearly £108,000 without needing to make any further pension contributions. All this wealth accumulation on an initial pension amount of just £10,000!
Compounding your wealth has a snowball effect. The interest you earn each year is added to your overall savings, increasing the amount of interest you can earn the next year.
Therefore the sooner you start saving for a pension, the longer the advantage you give yourself of compounding your earnings by the time you retire. Start saving in your thirties and you could enjoy the benefits of compounded interest when it’s time to retire.
Please note that the above example is for illustrative purposes only, assumes a consistent return and does not take into account any fees. The value of your pensions and the interest you earn on them can go up and down.
Watch your credit score
Having a healthy credit score is very important in your thirties, not only for a mortgage but also for overall financial health. Debts can prevent you from saving the right amount for your pension as you will most likely have to repay them regularly therefore reducing the amount of money you have available to invest.
It is exciting to have a new shiny credit card in your wallet, especially one with ‘accessible money’ in it. But that money is not really yours, and you’ll have to pay it back at the end of the month. We understand how tempting it is to buy this one “must-have” dress, or treat yourself to a good meal or have fun one weekend with your friends and pay the bill with your new credit card.
All these bills add up at the end of the month, and you have to pay back the borrowed money. When you spend more than you can afford, you get yourself into debt. It’s very easy to put ourselves in debt when the credit available to us is not feasible for us to repay.
Debt can prevent you from saving a good amount for your retirement, pushing your plans back to your forties and slowing down the advantages of compounding your wealth. It also adds a lot of stress which can lead you to make rash decisions.
Maintain a healthy credit score and a debt-free account for peace of mind.
Boost your income to boost your pension pot.
It is very common for people in their thirties to have an extra source of income, usually from a side job.
An extra job will not only help you financially in the moment and to live slightly more comfortably than you were already living, but it is a great way to save a bit more. It can be daunting, when you want to save for so many reasons, such as for a nice holiday or for furniture shopping, but setting up your priority list is a good place to start.
Of course, it depends on your life circumstances, lifestyle and whether you are left with an excess that you are willing to put on the side at the end of each month. But it is a good idea to take into consideration your pension when it comes to increasing your earnings, as an extra personal pension pot could immensely benefit you in your retirement.
What you can do at 40 years old
Another ten happy years go by, and you enter a different phase in your life.
You feel even more secure now, in most aspects of your life such as your job and your family situation. Your earnings are considerably higher and are looking to secure a comfortable living standard and are most likely in the process of owning your house. You are perhaps financially stable as well.
However, saving into your pension shouldn’t stop especially now that you are 10 years closer to your retirement.
Live within your means
Once you are financially comfortable, it is easy to start splurging mindlessly. This is because, as your salary increases, so do your living expectations. Having more money in the pocket means we can afford most of the things we desire, making it easy to spend unnecessarily.
Maybe you want to upgrade your car when it works perfectly fine, or get a new upgraded phone. But do you really need those?
This is why it is extremely important that you don’t get carried away in your forties and live a lifestyle that you can’t afford, just because the paycheck is bigger than it was a few years ago.
Spend according to your budget and live within your means, to avoid trouble with your pension savings. By taking control of your finances more diligently, you continue with your pension contributions without interference.
Maximise your retirement savings
In your forties, your quality of life has probably been enhanced as usually your finances have improved. You may be thinking to yourself: “What if you increase your pension contributions and try maximise your retirement savings?” Now would be the right time to ask this question as well.
Financial stability does not only mean comfort but also more opportunities to grow your retirement income, which includes your pension pots even more.
It is very common to make one-off contributions to your pension - on top of your regular contributions - whether it is a workplace pension or an individual one. If you find that you have excess finances that you could put into a savings account, consider putting it in a pension pot to get invested for you.
It is important, however, to take into consideration your annual allowance which prevents you from exceeding tax-free pension contributions. Your annual allowance is £40,000 as of 2021-22, including tax relief and employer contributions, and if you exceed that you will have to pay taxes on the excess. Therefore before making lump sum contributions to your pensions, it is good to check your annual allowance, as it can vary depending on your income levels.
If you’re able to maximise your retirement savings in your forties, consider doing it.
What you can do at 50 years old
Retirement age is fast approaching now. In fact, you are currently eligible to start receiving your private pension the moment you turn 55, if you choose to do so. State Pension eligibility is usually after the age of 65.
No matter the eligibility age, it’s on you to decide when exactly you want to stop working and start receiving your pension. According to Experian, the common retirement age is around 62 for many, but there are those who decide to retire early due to ill health too.
If you’re one of those people who have never given much thought to their retirement and never planned for it, there’s still hope for you. You can still save for a pension, even in your fifties, just in time for you to retire. If you’ve been saving for years and you want to maximise your savings, the guidance applies to you as well.
The carry forward allowance
Each financial year, there is a cap that the Government puts on tax-free pension savings, which is called annual allowance as mentioned previously.
Some people are able to bring forward past annual allowance that they didn’t use. This allows them to save a bit more in the current financial year, and not completely miss their chance of saving. This is called a “carry forward allowance”.
For instance, if you have not used up your annual allowance, you are able to carry forward past allowances for up to 3 years even after maximizing your allowance in the current year. This allows you to make up for past years’ unused allowances.
If you’re a first time pension saver and you’ve decided that now is the time to start planning and saving for your future, check your eligibility criteria for this type of tax advantage. You can check the criteria even if you’ve been saving for years and you want to maximise your earnings.
It’s never too late to take back control of your finances.
Bring your pensions together
Now could be the time to find and consolidate all your pensions together. Why? For your peace of mind and so that you can manage them in one place.
You might not realise this but with each job you’ve had in your lifetime, you are likely to have a separate pension pot. Auto-enrolment kicked in from 2012 which means for all employment after 2012, you will definitely have a pension. You should find these pots and consider transferring them into one so that you can easily track your pensions.
This move can prove to be beneficial for you because:
- It can be cheaper for you, since fees might be less with a particular pension provider.
- You will be able to see exactly where your hard-earned money lies and the value of it.
- You’ll have less stress on your mind about your pensions and your retirement when you’re aware of your savings and where they are.
- You could have access to various investment options at different providers and it can be easier to manage your plans if all your pensions are in one place.
At Raindrop, we have built a digital pension which allows you to bring your pensions into one place in a very easy manner. We also offer a service to help you find your pensions, however this is only available if you choose to combine the pensions with Raindrop.
Our easy to use pension solution has an online dashboard where you can track your pension performance and make pension contributions with the click of a button.
You can sign up to our find and combine pensions service here.
We take the stress away from pensions as we want to help more people not postpone taking care of their pension and retirement.
If you do choose Raindrop, please note that like all investments your capital is at risk and the value of your pension can go up as well as down. Tax treatment depends on an individual’s circumstances and may be subject to change in the future.
It is never too late
Pensions have many benefits and you are able to save no matter what stage of life you’re in. Take control, start saving and enjoy your retirement.