Why you need to start saving for your pension today! (And what to do)
Are you currently saving for your retirement? Find out why having a pension is so important, and what you can do now to ensure a more secure future.
When I was 23 years’ old and working in London as a trainee accountant for one of the big firms, I had a meeting with my bank manager. Well, it was the ‘90’s… things were rather different then.
I mentioned that I wasn’t eligible to join my employer’s pension until the ripe old age of 27 and asked for advice. The response I got, which possibly shocked me even then more than it would now, was that I didn’t really need to worry about it as I’d “be better off paying into my husband’s pension” as I would “want to stop working in a few years”.
Having done work experience in various financial institutions (and incidentally being resolutely single at the time) I was more than aware of the benefits and importance of having my own savings and how much better it is to start saving sooner rather than later, so I went and found another bank.
But I do wonder to what extent that attitude (or variations of it) continues to prevail in financial institutions today and how far it has permeated our own consciousness. How many of us prioritise organising or optimising our pension savings when faced with so many other demands on our time and our bank balance?
Why do we put off saving for our retirement?
While most people would consider pensions or other retirement savings important, as a tax adviser I see a number of scenarios which suggest that retirement saving remains low on our list of priorities:
- Business owners who have left their former employers’ pensions but haven’t quite got around to setting anything else up.
- Business owners who have invested all their money in the business, leaving very little in their own hands.
- Employees who’ve moved around and have a number of pensions but aren’t quite sure where or how much.
- People in their 30’s or 40’s who are aware of some of the large pension scandals and have no faith in pension investments.
- And recently, employees assuming the new workplace pension will be the answer, giving them one less thing to worry about.
Why you need to start saving now
As the state pension age moves ever upwards, and the future of state pension provision in the UK on the current Pay As You Go system looking increasingly precarious, it’s becoming more and more important that we all do what we can to save for retirement.
The new pension freedoms introduced in April 2015 mean that pensions are no longer the savings “black hole” they once were. The key changes were as follows:
- No requirement to buy an annuity: from age 55 you can choose whether to draw down from your pension, take a lump sum and/or regular income or whether to leave the fund intact.
- Pensions can be passed to your spouse or the next generation, free of inheritance tax.
There is therefore less trade-off in relation to flexibility in return for the tax benefits. Pensions are still potentially far more tax efficient than non-pension savings: individuals can typically get a tax deduction at their marginal rate for pension contributions of up to £40,000 per annum. For a 40% taxpayer, this means that saving £4,000 in their pension will only cost £2,400.
Using your home as a financial resource
If you’re having financial problems, you can use your home’s equity as a resource without burdening your loved ones.
If you are on a fixed income then you can apply for reverse mortgage assistance. A reverse mortgage will allow you to access your home’s equity in small monthly amounts, one large payment, or as a line of credit, depending on the loan terms you request.
The biggest reverse mortgage disadvantages and advantages are that your home may be sold if you pass away or move out before the loan is repaid. But your lender cannot seize any assets other than the money made from that sale.
This means that any remaining loan balance will not have to be paid by you or your heirs. And if the sale of the home brings in more money than you owe then the remaining balance will go to you or your family.
Here’s what you can do today
If you’re unsure of your current pension provision, or aren’t currently contributing to one, here are my suggestions:
- Dig out the paperwork you have received regarding your pensions in the past, and call or write to the provider to request an updated pension forecast.
- If you’re currently in a pension, ask your employer or dig out the paperwork to find out how and where it is invested.
- Do some research on the types of pension available to start to understand what might suit you and your lifestyle – if you want control over your money, a flexible style of pension such as a Self-Invested Pension Plan (a SIPP) or for business owners a Small Self-Administered Scheme (a SSAS) might be more appropriate than a traditional pension fund.
- Speak to a qualified adviser about the benefits and costs of transferring existing funds to a new pension and what they would recommend for you.
For business-owners, it’s worth bearing in mind that if an occupational pension is set up (such as a SSAS pension for smaller businesses – it can have up to 10 members) there is a facility to borrow back up to 50% of the pension fund into the business.
So rather than reducing the money available, a SSAS can actually free up more working capital. Similarly, a SIPP or a SSAS can be used to buy commercial property for use in your business or as an investment.
Start thinking about (and acting on) your retirement today
But whatever your situation, the main message is: don’t put it off, start thinking about your retirement savings and act on it today.
Naturally, financial advice should be taken from a qualified, FCA-recognised adviser or wealth manager before making any decisions around pension investments, whether moving an existing pension, taking benefits from a pension or making new contributions. None of these decisions should be taken without expert advice.
You can read more about pensions on Rachel Sestini’s website Sestini & Co Pension Trustees.