There are a number of ways to save for retirement, but for most of us a pension scheme will be the core of our planning. This is especially true if you have a workplace pension scheme, as most people now do. Since auto-enrolment began in 2012, more than six million people have started saving via a workplace scheme.
The big advantage of workplace schemes is that not only do you get tax relief on your contributions (see How pensions are taxed), but your employer will contribute on your behalf. At present, employers are required to pay at least 1% of your salary into their scheme. This minimum will rise over time, to 2% in the 2018/2019 tax year and 3% in the 2019/2020 tax year.
It will rarely make sense to opt out of a workplace scheme altogether, since you will be giving up free money, but unless your scheme is exceptionally good, you will almost certainly have to make additional provision elsewhere (note that most people don’t save enough – see story below). This may well be into a private personal pension plan. These savings are subject to the same tax reliefs as your workplace pension (although, explained in How pensions are taxed, it is important to make sure that you don’t exceed the annual and lifetime allowances for all your pensions combined).For maximum flexibility, consider a self-invested personal pension (Sipp – see A more flexible pension), but a cheap personal pension may be the best option if simplicity is your top priority. Going through discount broker Cavendish Online lets you invest in a low-cost pension from fund supermarket Fidelity with no minimum fees.
“You’ll need to make provision outside your workplace pension scheme”
People who have held multiple jobs with different employers may find they have numerous small pension spread across different workplace schemes. In that case, you may also want to consider consolidating them into one scheme – or transferring them into your new employer’s scheme – to make it easier to keep an eye on performance and fees.
Individual savings accounts (Isas) offer another good option for long-term saving. You can pay up to £20,000 into Isas in the current tax year. Traditional Isas don’t get tax relief on contributions, but you don’t pay tax on investment returns in them and you can withdraw money tax-free whenever you like. However, the new lifetime Isa offers another option for those aged between 18 and 40. This lets you save up to £4,000 a year, and get a government bonus of 25%. But there are restrictions on withdrawing your money: you can only do so after you turn 60, unless you are using it as a deposit on your first home.
Finally, don’t forget your state pension. The full pension now amounts to £8,300 per year. You need ten years of National Insurance contributions to get any state pension and 35 years to get the full amount, but you can buy extra years to top up if you need. Get a pension forecast at Gov.uk to see when you’ll be eligible and how much you’ll receive.
How much should you save?
Whatever you are saving for retirement at the moment, it probably isn’t enough. The average person saves £195 a month and the average pension is worth £50,000, according to insurer Aegon. That would provide an income of just £2,500, based on current annuity rates, taking your total income to £10,800 when you include the state pension. The standard advice is to aim for a retirement income of around 60% of your working salary. One very rough rule of thumb is to take your age when you first start saving for retirement, halve it and put that percentage of your pre-tax salary into your pension each month, increasing it in line with your salary each year. However, online tools such as Retire Easy can let you estimate what you need in a more sophisticated way.