Money is never far from our minds. Sat at our desk, or in the middle of the night, we find ourselves thinking. ‘Will I ever be able to retire?’ Or ‘what if I need money fast to cover a medical bill?’
Saving for retirement can feel so daunting that many of us would understandably prefer to avoid thinking about it. But there are also some very compelling reasons for overcoming that hurdle and seeing it as an opportunity as well as a challenge.
The responsibility for saving for our retirement has in recent years shifted increasingly to the individual. The days of guaranteed final salary (or Defined Benefit) schemes, with their guaranteed payouts, are becoming a thing of the past. Now, most of us are in Defined Contribution (DC) schemes, where the outcome depends on investment performance, charges and, in particular, how much we pay in.
So, saving for retirement is no longer something we can afford to ignore. The good news, however, is that by following a handful of simple rules, you can make that responsibility work in your favour. Here are five steps that will give your retirement savings a solid foundation.
1) Make it a habit
Thinking about the level of savings required for a comfortable retirement can be off-putting. At first, however, it’s the act of saving that really counts, rather than the amount you put away.
“A lot of people think they need to save a lot of money straight away, but it’s ok to start off smaller,” says Tony Clark, Senior Propositions Manager at St. James’s Place. “It’s more important to be realistic and get into the habit, and you can then build it up over time as and when you can.”
The key is to put small amounts into a pension and/or a Cash or Stocks & Shares Individual Savings Account (ISA) and let the magic of compounding go to work. This is the snowball effect that happens when the money generated by savings (such as interest) goes back into the pot and then generates its own growth.
2) Have a plan
Or at least have a series of objectives that can help motivate you to save by giving you direction, purpose and incentives.
Knowing why you’re saving and what you want to use the money for can really help, says Tony.
“You might have objectives for different time frames,” he says. “The short term might be about having a rainy-day fund, the medium term perhaps saving for a car or a home, and the longer term is about setting yourself up for when you’ve finished working.”
Diversification refers to putting your money in different places or assets rather than saving it all in one place.
This becomes especially important when you have money in pensions and investments that are linked to the stock markets. The risks you’re prepared to take should be appropriate to your plans or objectives, and to your own personal attitude to risk.
“Make sure you use your tax-efficient allowances such as ISAs and pensions, and diversify across products with different risk levels,” says Tony. Using both a pension and an ISA is in many ways a better approach than saving into just one or the other, because it gives you instant diversification.
4) Consider your own situation
There are two main tips or rules here, depending on whether you’re employed or self-employed.
If you have an employer, find out what it will contribute to your pension. Most will match your own contributions or pay in a certain percentage of the amount you do. This means that not paying into a workplace pension can effectively mean turning down more money from your employer.
If you’re self-employed, one thing that can make a big difference is using the ‘carry forward’ rule. This allows you to use any unused allowances from your previous three tax years to maximise your pension contributions in the current tax year. It also means that if you don’t use all your allowance this year, you can carry it forward and still benefit from it in future.
“Self-employed earnings can be lumpy and unpredictable, so the carry-forward rules can play a vital role,” says Tony. “If you’ve had a good year, for example, you can carry forward from previous years to save more into your pension, if you can afford to.”
5) Take advice
There are many excellent reasons for taking professional financial advice, including the role we can play in helping you get into good habits and keep them going.
“What will help keep you on track are those regular check-ins with your financial adviser,” says Tony. “Life can take over and even important things can lose our attention, so a regular check-in with your adviser puts the focus back on your planning.”
The way advisers interact with clients has evolved, he adds, making it even easier to keep in touch. “You can’t replace face-to-face advice, but digital methods can help in keeping that regular contact going, which is absolutely key,” he says.
Everyone has different priorities, circumstances and objectives, but we can map out a plan with you and help you keep it on track. So get in touch for advice.
The value of an Investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount Invested.
An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
Please note that Cash ISAs are not available through St. James’s Place.