It’s getting easier to look forward to a ripe old age.
Official figures suggest that a 65 year old man will on average live to 86, and has a good chance of seeing 90. A woman of 65 will on average live to 88 and might expect to reach 93.
But living longer actually means we have a longer period of retirement to fund. How easy is it going to be to live to a prosperous old age?
Why it will cost you more to retire
Of course, you may have a defined benefits policy, or an annuity which guarantees to pay out for as long as you are alive to collect it. Fewer of us will find ourselves in that position, and will have to expect to save to cover a longer period of retirement. Living into our 80s and 90s not only means more years of funding required; infirmity and the need for care and support means our funding needs may actually increase.
The average household will spend £420,000 in retirement. But while that may sound an impossible sum, remember, you can save up to £1m into your pension pot – and it is perfectly feasible to do so.
1. Get the taxman working for you
Pension saving can build your retirement pot faster because it entitles you tax relief. In effect, the taxman is contributing to your savings. How much he gives is based on your income tax bracket.
A basic rate taxpayer pays £80 to add £100 to their pension. A higher-rate payer enjoys more relief, and so only needs to pay £60. There are limits. You can only save up to £40,000 a year into your pension, or as much as you earn in a year, inclusive of the tax relief. Someone with a £35,000 salary would be able to make contributions of up to £28,000 of their own money, with another £7,000 contributed by the taxman.
Remember, you may have to ensure you get your tax relief. A workplace pension employer should have the correct tax relief applied, automatically. Self Invested Personal Pensions (SIPPS) will not. They may claim basic rate relief automatically, but if you are a higher earner, you will need to claim the extra relief through your tax returns.
2. Get your employer to help you
Companies are required to save into a pension scheme for their employees. Contribution levels are low, but they are set to rise, and many companies offer more generous contributions if you save more.
Some employers provide pensions via salary sacrifice. This means pension contributions are made in lieu of salary, with savings on National Insurance payments for both you and the company.
3. Go for growth
Of course, most pension plans are invested to minimise the risk to your money. A cautious approach might not be enough to grow it to a £1 million. You can invest for growth – particularly in the early years when you can have a greater tolerance for swings in the value.
There are a wide range of investment funds available, but you will need to monitor your holdings for performance and to keep them in line with your appetite for risk. If you are not an experienced investor, expert advice will be essential.
Remember the state pension
It might not count towards your £1 million target, but the guaranteed payments from the state pension are the basis of many people’s retirement income. The maximum pension you can get currently is £159.55 a week if you have 35 or more years of National Insurance contributions. If you have gaps in your record that leave you with under 35 years these can be filled with a cash payment. Any years spent out of work raising children can still count towards your NI record but you must tell the Department for Work and Pensions about it and get them to approve your entitlement.
4. Start young
The sooner you start, the easier it is going to be to reach that £1 million figure. Compound interest can grow your savings like nothing else, but it does take time.
Calculations by insurance giant Prudential, based on 4% annual returns, show a 25 year old, higher rate taxpayer could save £1m by 65 by saving £506 a month.
A basic rate taxpayer does not enjoy the same tax advantages, and has to save £675 a month.
If the same individuals wait until they reach 45 to start saving, the higher rate payer would need to save £1,630 a month, while the basic rate payer would need to save £2,174, which would be close to their entire take home pay.
5. Get expert advice
Perhaps the most important factor of all in making the most of your pension is the quality of advice you get.
Things like tax and allowances, selecting the right investment, and when the time comes, the best way to use your pension pot all demand up to date knowledge.
Getting expert advice can help you build your wealth and could improve your chances of building that £1million pot. Fortunately, you can find it at Continuum.