How to save for retirement

When people talk about pensions, they generally mean an amount of money you have to live on when you retire. A pension plan is a specific type of account you can invest this money in. Read on to learn how pensions work and how to save enough for retirement.

As with all investing, your capital is at risk.

Know your pension basics

It’s easier to reach your retirement goals when you understand the different types of pensions and what they offer. Here’s some key information to bring you up to speed.

What are the benefits of a pension?

Pension plans have several advantages when you’re putting away money for retirement.

One of these advantages is tax relief. Essentially, the government pays back income tax on the money you pay into a pension. This means when you put in £80, the government tops it up to £100 (or more if you’re in a higher income tax bracket). Bear in mind that tax treatment depends on your individual circumstances and could change in the future.

Another advantage is the potential for your money to grow more than it could in a bank account. This is because the money you put into a pension plan is invested. Long-term investments have historically out-performed the interest rates on savings accounts.

Although, past performance is not an indicator of future results so you may want to open both a pension and a savings account. A savings account can be handy if you want to earmark some money for retirement but need easier access to it just in case.

What are the types of pensions?

There are three main types of pensions – the state pension, personal pensions and workplace pensions.

The state pension is given to you by the government if you’ve made National Insurance contributions for 10 years or more (note: you'll need 35 qualifying years to get the full new state pension). It’s unlikely to cover more than your most basic needs. You’ll need to invest in a workplace and/or personal pension to afford a more comfortable retirement.

A Self-Invested Personal Pension (SIPP) is one you set up yourself. It typically gives you the most control over how much you contribute, when you contribute, how your money is invested and the level of risk.

A workplace pension is arranged by your employer. You’ll normally be automatically enrolled to it. There are two main types of workplace pension schemes:

• Defined contribution pension. This is the most common type. Both you and your employer must make minimum contributions every month (yours may be taken directly from your paycheck). This money is invested in a fund, and how well your investments do will affect how much you get when you retire.
  
• Defined benefit pension. This type is most common in the public sector and at some large corporations. It guarantees you a set income when you retire. The amount you get is based on your salary and length of service.

Get a clear view of your retirement fund

Ready to take control of your pension? A good place to start is finding out how much you’ve already got set aside for retirement. This may be split across multiple pension schemes, particularly if you’ve had a few different employers.

Not sure where all your pensions are? You’re not alone. More than 2.8 million pension pots are currently “lost” in the UK, meaning the provider has lost touch with the policyholder. The average value of one of these lost pensions is £9,470!

Check out this article on how you can trace your lost pensions in just a few steps.

If you’re finding it tough to keep tabs on several different pensions, you may want to consolidate them into one account. You can do this with a Plum SIPP and invest in a choice of risk-managed or diversified global funds. Remember, your capital is at risk if you choose to invest.

Work out how much you need to retire

How much you should be contributing to your pension depends on a few things, including:

• Your living expenses in retirement. A common rule of thumb is 70-80% of your current income. But in reality, everyone has different expectations for their retirement. You may want to compare the cost of a basic lifestyle with a more comfortable or luxurious one. This can help you find a balance between what you want in retirement and how much you’re prepared to set aside.
  
• How much you can afford to set aside. We’re talking about both now and over the course of your working life. If you’re at the start of your career, chances are you can’t invest much yet. But you may be able to make up for lost time if your salary increases in the future. That said, be cautious with your expectations as it’s hard to know what the future holds. It’s best to invest as much as you can comfortably afford.
  
• How many years you have to invest. Starting early gives you more time to make contributions and your money more time to grow. But don’t panic if you’re a late bloomer. There are still plenty of reasons to feel good about your pension.

Set goals and get your pensions in order

Once you know how much you’re aiming for, it can be helpful to set goals for the short, middle and long term.

Goals can motivate you and focus your efforts. But remember that life can be unpredictable. Be kind to yourself and consider adjusting your goals if they’re making life too difficult. You should review your goals after a big life change, such as going back to university or getting a divorce.

It’s also a good idea to review your existing pensions to ensure they’re helping you meet your retirement targets. Here are some questions to ask yourself:

“Can I pay in more?” See if there’s room in your monthly budget to bump up your pension contributions. If not, don't worry. The important thing is that your pension contributions align with your current circumstances and financial position.

“Can I get more from my employer?” Some employers increase their contributions when you increase yours. This is called ‘contribution matching’ and it can be an effective way to boost your pension pot.

“Am I happy with the level of risk?” Money in your pension is invested, meaning the value of your pension can go down as well as up. Younger people may prefer to invest more aggressively as there's more time to ride out market volatility. Meanwhile, people approaching retirement may look for stability and lower their risk level.

Keep in mind that your risk level is a very personal thing, which depends on your personal circumstances.

“Do my investments align with my values?” You may prefer a pension fund that uses your money for Environmental Social Governance investments. These are investments in shares of companies that must have either an environmental, social or governance element as a key part of their business model.

At Plum, we offer a choice of funds so you can better align your pension with your personal values and beliefs. Check out our Future Planet fund.

“Is my pension provider charging too much?” Subscription charges, management fees and other costs can cut into your retirement investments. If your provider has high fees, it’s worth seeing if your money could do better elsewhere.

There are no subscription charges for the Plum SIPP and you can see our fees here.

“Would it help to consolidate my pensions?” If you’re tired of juggling multiple pensions, consider moving them to a single pension plan. This is called consolidation. It may help simplify the way you manage and contribute to your retirement pot.

When you consolidate your existing pensions into a single Plum SIPP, you’ll be able to manage your entire retirement nest egg in the same app.

Please remember that, as with all investing, your capital is at risk. You shouldn’t invest in or deal in any financial product unless you fully understand it and the inherent risks. If you automate and invest you should be satisfied your choices are suitable in light of your circumstances and position.

The information contained in this article is for general guidance only and is not intended to constitute investment advice or any other advice or recommendation.