Everything you need to know about saving for retirement
When should you start saving for retirement?
The best time to start saving for your retirement depends on your circumstances, but it’s best to start saving as early as possible to make the most of the time you have to save. It might seem too early, but if you’re in your 20s, now might be the perfect time to start, even if you can’t afford to save much.
Simply learning about how to save, including understanding pensions and savings accounts, can start you on the path to saving for retirement.
Why is it important to save for retirement?
Many people in the UK aren’t saving enough to live on once they retire. If you’re one of those people, you may have to consider retiring later, start saving more now or adjust your expectations of what you may be able to afford in retirement.
The current State Pension provides British citizens with a financial buffer, which, depending on your circumstances, might not be enough to live on in retirement. The maximum State Pension for 2020/21 is £175.20 a week, or £9,110.40 a year.
How do I save for retirement?
Saving into a pension is the most popular way to save for retirement in the UK. You can contribute to a pension as soon as you start earning, but you won’t be able to access the money until you’re 55. Pension plans also offer tax relief, as you can claim some tax back on the money you put into your pension while you earn interest on your contributions.
If you have a lump sum to save, a fixed rate bond might also be worth considering. Fixed rate bonds are savings accounts that offer fixed, competitive interest rates over varying terms, typically between six months and five years. You’ll earn the same interest rate from the day you open the account until the end of your fixed rate term, so you’ll know exactly how much you’ll save. At the end of your term, you can withdraw your money and place it into another fixed rate bond, or you could add it to your pension plan.
Notice accounts might also be worth considering if you want to start saving for retirement but can’t commit to locking away your money for the long-term. Notice accounts allow you to save money and earn interest while having the flexibility of withdrawing your money after a set period, typically between 30 and 90 days.
Do I need a pension?
It’s very likely that you’ll need a pension. UK employers auto-enrol eligible employees into pension schemes and make contributions on their behalf, so unless you’ve opted out, it’s likely that you already have a pension. One benefit of having a pension plan is that you’ll pay less tax, as a portion of your salary is paid into your pension pot before the tax that you need to pay on your income is calculated. This means that in addition to growing your pension, you pay less tax to the government on your salary. If you save through a pension scheme, your regular contributions can be invested so your pension should grow throughout your career and provide you with an income above the State Pension once you retire.
How can I maximise my retirement savings?
If you want to maximise your retirement savings, you might want to keep in mind the following:
1. Start early
Whether you apply for a pension or open a savings account (or both), the most important part of saving for retirement is starting as early as possible. The earlier you put your money away in a pension plan or savings account, the more time your investments have to grow.
2. Clear your debts
It may not be easy to pay your debts off early, but doing so means you will free up more funds and avoid paying high interest rates.
3. Prioritise your investments
There are always many reasons to save. Some save for a mortgage, car, or a wedding, but only you can decide what you need to prioritise. If you concentrate on your pension or saving for retirement with a savings account, you may earn more in the long term.
4. Set goals
If you set firm goals, it may be easier for you to motivate yourself to save.
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