Financial expert Maike Currie is back with more pension guidance
Keep the pension pot spilling over as you head into retirement is the key guidance from financial expert Maike Currie in her second instalment on pension. Before you read this you may want to prepare by reading the pension jargon buster she provided us with previously.
Cover essential expenses with secure income
Don’t underestimate your essential expenses. Start with what you actually spend now rather than trying to do a bottom-up budget estimating bills.
Sources of secure income include state pension, company final salary pensions and annuities.
You can increase your state pension by deferring taking it. For people reaching state pension age before 6 April 2016 this is a particularly attractive option.
If you have a final salary pension then you may be tempted to cash it in for what sounds like a large investment fund but beware, this is rarely the right course of action. Having secure income is gold dust in avoiding running out of money.
Invest in growth assets to combat inflation
Inflation is the silent assassin. Retirement could last over 30 years and just consider how prices have risen recently.
Insuring against inflation is expensive. Buying an annuity at age 65 which increases in line with inflation pays 40% less than an annuity that does not increase.
A diversified portfolio of stocks, property and bonds can provide growth but you will need to watch your investments carefully. If markets fall, then be prepared to draw less income for a short period.
Plan for the unexpected
Whether it is equity in your home or a rainy day fund set aside, have a plan to deal with the unexpected events such falling ill, needing extra care in your old age or having a sudden expense like a major house repair. It is good to have secure income but you do need to keep some capital available should you need it.
The solution is likely to be a mix of investments, cash and annuities but the right mix will vary from person to person.
Spend money safely in retirement but remember you only live once. Don’t deny yourself the chance to do things because you are frightened to spend money.
You’re never too young
You’ve probably got debts to pay off, you may have plans to make a start on the deposit for that property you want to buy one day, and that’s on top of the rent and bills and all the other costs of life. And let’s not forget an active social life to fund – which admittedly doesn’t come cheap. So it’s easy to see why saving for your retirement seems impossible.
But while your retirement years feel like a lifetime away – and they admittedly are – that means even the smallest sums you can set aside now will have the chance to grow into a substantial pot of money for your later years.
Any contribution from your employer into your workplace pension scheme is a no-brainer. Grab it with both hands, because that’s money you’re getting on top of your salary. While you can’t actually get your hands on it until you’re at least 55, by then it should have grown into a nice little pot of cash for you.
Any additional contributions you make will attract tax relief. This means that if you pay through your payslip you end up paying less income tax, because contributions are taken out of your gross i.e. untaxed pay, so reducing the amount you pay tax on.
If you pay into a personal pension or a SIPP, HM Revenue & Customs will top-up your contributions at your basic rate of tax. This means you only have to make contributions of £2,880 a year to have a total of £3,600 added to your pension pot.
Pensions may be the most effective way, but they are by no means the only way to save for your retirement.
Set up a standing order for a small sum of money to go into stocks & shares ISA each month. You don’t have to sacrifice a large amount. Even a small sum will grow nicely. The beauty of starting saving now is the length of time that you will be giving your money to grow. Start small, but start now and it could turn out to be the best investment you make.
The 1% difference
According to research from Fidelity International, the average pension pot for a man currently aged between 25-34 will be worth £142,836 at the State Pension age of 68, falling to a pot of £126,784 for women – a gender pension gap of almost 11%.
This is primarily a result of women still earning less and taking time away from their careers to raise children or to care for a sick or elderly relative, referred to as the ‘motherhood penalty’ and ‘the good daughter penalty’, respectively.
Analysis from Fidelity International in its state of the nation report, ‘The Financial Power of Women’, however, shows that women could close the gender pension gap by dedicating an additional 1% of their salary towards their pension early on in their careers. This is an average of just £35 per month in contributions over 39 years.