There are so many things we all want to save for – a holiday, a car, a mortgage, a wedding, a baby. We’re not quite so keen on saving for our pensions though which means some of us are at risk of spending our retirement years in poverty.
But with a bit of planning and saving discipline, a healthy income in later life should be within reach. Here are seven things to ponder if you are starting out on your pension saving journey.
1. Your retirement might last a very long time
The chart below shows how long a 65-year-old man and woman are expected to live and how life expectancy has been increasing. Life expectancy is even higher for young people. According to the ONS a 25-year-old female in the UK today has a life expectancy of 89 years, and a 1 in 4 chance of living to 97. In Japan half of all babies born now are expected to live beyond 100.
Expected years left to live at age 65 in England
|in 2010||in 2013||in 2019|
2. A state pension will not be enough
The New State Pension pays just over £175 a week compared to the current national average take home pay of £585. You won’t be going on holidays or even eating out very often if that is the bulk of what you have to live on. To get the full state pension, which you won’t be able to claim until your late 60s, you have to pay national insurance for 35 years.
3. The power of compounding
The earlier you start saving for a pension, and putting in as much as you can afford, the more you can benefit from the power of compounding. If you are very lucky, your parents might have set one up for you as a child. The chart shows how the same pot of money with no further contributions is worth so much more the longer it stays invested.
4. Get your OWN pension
Don’t assume that because you are in a relationship and your partner has a pension that you will be OK. Many relationships break up and there is no guarantee that a “shared” pension will survive that, particularly if you are cohabiting. In any case by not having your own pension you are missing out on free money from the government and possibly an employer. Even if you are not working you can claim tax relief of £720 on pension payments of £2880 a year.
5. Keep track of your savings
Planning ahead and being a proactive manager of your pension(s) makes all the difference to the income you will eventually receive. Most people end up with several pension pots as they move from employer to employer. Even though you will stop making payments into an employer's scheme when you leave, that pot should continue to grow. Make sure you tell each pension provider when you move home so that you continue to receive statements - you don't want to "lose" a pension along the way. It is possible to combine pots of money so that they are all in one place.
We have plenty of handy hints to help you manage and consolidate multiple pensions.
6. Planning ahead makes all the difference
It's important to have an idea of what pension money you are building up. Unless you are in a defined benefits pension (which means your pension is guaranteed), the amount you get back will depend on how much you have paid in and how well markets have performed during that time. Pension funds are mostly invested in the stock market. You will receive annual statements from your pension provider each year and this will predict what pension you are likely to receive and allow you to have a good overview of what all your pension pots are worth and whether you are saving enough.
Plan charges also have an impact on returns, and it is particularly important for self employed people setting up their own pension to pay attention to and compare charges.
7. Understand your options
If you are lucky enough to be a member of a defined benefits pension scheme, don't let anyone persuade you to transfer out of it unless you 100 per cent understand the reasons why you might want to do this. Only in exceptional cases does it make sense. You will be giving up a guaranteed income for life and you will be faced with the responsibility of investing the pot of money yourself and making sure it lasts the whole of your retirement. You will also be at high risk of falling prey to fraudsters, and you will have to pay a substantial amount in charges to arrange the transfer.