Lifelong saving – why it pays to have a pension at any age
Saving towards a pension can be one of the best financial moves you can make. But when is the right time to start, and is it ever too late? We look at why any time is a good time to save towards a pension.
20s to 30s
This is the easiest time to make money for your retirement by setting up good money habits and lifelong saving. By simply putting away regular amounts from your salary each month, the effects of time and compounding interest mean that, by the time you reach retirement age, the savings will have multiplied exponentially. Although money can be tight at this time of early employment and starting salary levels may be low, try to make even a minimum contribution to your pension. This means that not only are you regularly putting money aside yourself, but since auto-enrolment commenced in 2012 your employer will also make contributions on your behalf, effectively doubling (or more) the amount. By starting early, you give your savings a lifetime of growth in a tax-protected environment. It’s an easy win that your future self will thank you for.
30s to 40s
Statistically speaking, this can be the ‘make or break’ decade for pension savings as career progression can mean higher earnings and greater pension contributions, or at the opposite end, career breaks to start a family or business can mean disrupted contributions for a time. This can also be the decade when pension savings can diverge within relationships, as one or other partner may take a career break to start or support a family. In the face of other financial demands at home, it can seem difficult to maintain regular pension contributions. Wherever possible, it is worth maintaining some level of pension contribution and when life allows, start to increase these again. During maternity or paternity leave, your employer should continue to pay their usual contributions, so long as you maintain your minimum.
Pensions cannot be held jointly, so talk with your partner at home about how you may both maintain separate pension contributions, such as reaching an arrangement to level out the income coming into the household and fairly sharing it towards your separate pensions. Make sure you are claiming all reliefs and entitlements for which you are eligible, including the marriage allowance. Remember to claim child benefit even if you or your partner earns more than the child benefit threshold, as this counts towards your national insurance contribution (NIC) years and helps to ensure you receive the maximum state pension entitlement at retirement.
If you are single parenting, it is natural to put all thoughts of the future aside while you focus on nurturing your young family, but try wherever possible to keep making small contributions to your pension.
If you are starting a business, don’t forget your pension provision amongst your start up plans. It can be tempting to view your business as your retirement plan but this can be putting your eggs in one basket. If market valuations are low or a buyer is not available when you wish to retire, you may find that your retirement dreams are put on hold, or reduced. A good financial plan rounds out risk, so it can be worthwhile speaking with a professional for advice in the early stages to understand the best options available to you. They will be able to guide you on how to structure your company and pay yourself and any employees an income, as well as how to set up an effective retirement plan. Some pension products will even allow you to purchase property where it is connected with the purposes of the business, as well as helping to reduce your corporation and income tax burden, so can be a sound financial move beyond just viewing your retirement plan in isolation.
40s to 50s
Relationships, family and businesses continue to grow and evolve, and the disparity in pension savings can become more obvious in this decade. If you are experiencing a relationship breakdown, don’t be afraid to speak to a professional for guidance on how to manage your finances at this time. Pensions should be an important part of any discussion about financial settlement, and a trusted financial advisor will help you to understand your financial position and the options available, taking away the financial pressure and providing you with peace of mind, so that you can focus on you and your family.
If your business is thriving, or has hit harder times, you will have complex financial needs and may feel responsible for employees, shareholders and family members with regard to any decisions you may make.
50s to 60s
For some, early retirement is now a reality and you may be considering when you can retire, and how much you will need. For others, you are likely to be approaching the final stretch of saving for your retirement, and are making focussed attempts to boost your retirement savings wherever possible.
If you are just starting to think seriously about your pension for the first time, don’t worry that you have left things too late. Any time is a good time to start planning for your retirement, and today is better than tomorrow. It is important to take advice at this time, so that you can make the best decisions and set a confident plan for the future.
60s to 70s
These are the peak years for retirement and when many start to draw on the savings they’ve worked hard to accumulate. The state pension becomes available at the age of 66 (assuming full NIC contributions of 35 years), or you may choose to defer it until a later date.
By now, your pension investment strategy will most likely have shifted from the growth phase to risk reduction. If you have a defined contribution pension, you will have a number of flexible options regarding taking your pension savings as a lump sum, or as income, or a combination of both. You may like to consider other financial strategies beyond your pension, such as investing your lump sum in a different investment vehicle, or setting up a trust for the benefit of others.
Your pension is very tax efficient, so you may decide to draw your retirement income from other sources first, and save your pension for your later years.
If you have a defined benefit pension, your employer scheme will pay a set annual income throughout all the years of your retirement, providing peace of mind about your income levels regardless of market fluctuations or values.
You may have a combination of these, meaning that multiple pension options may be in play at any particular time.
70s and beyond
Now all your retirement planning comes to fruition. The focus will be on longevity of your pension, ensuring that the funds last for as long as you need them, providing for your long term care, and then after, providing for others when you are gone. A pension usually does not form part of your estate for inheritance tax calculation purposes, so you may still prefer to use other means to support your retirement before drawing on your pension.
Whatever age or stage you’re at in life, it’s never too late to start saving towards your retirement or to check if your retirement plans are on track. Speaking with a trusted financial advisor will help you to create a retirement plan that works for you, taking all of your circumstances and goals into account, so you can enjoy the retirement of your dreams when the time comes.
