It’s amazing how, even as adults, we subconsciously associate planning for things like pensions and retirement as something to worry about in the future. A problem for old people, if you like. But the sobering reality is that many young adults and those in their 30s in the UK are headed for severe financial problems later in life. In fact, a recent report suggests that in today’s terms, we each need a pension pot in excess of £600,000, but the average 35-year old has saved just £14,000. And even though the state pension comes in handy, it is not a sufficient amount of money to live off in isolation.
True, as parents, our gut instinct is to invest in our children and family as much as possible. But it’s so important to leave a bit behind for your golden years. Otherwise, perversely, you could end up being a drain on the very people you’re trying to help – your children.
Of course, the key is to build your nest egg in the best possible way. Or ways. It turns out there are actually many ways to skin a cat…
For those mums who are in work, auto-enrolment into a pension will become a legal requirement for any employer in the next 18 months or so. You as the employee will have the ability to opt out, but really, there are unlikely to be too many occasions where this is a sensible option. That’s because pensions have two significant benefits. Firstly, the employer has to match your contribution up to a set percentage – which essentially amounts to free money. Secondly, your pension contributions are deducted before tax, meaning the taxable amount on your salary is reduced.
There are different types of pension too, but the good news is that a change in regulations last year means that you’ll have access to your pension from the age of 55, and be able to draw the first 25 per cent tax free. Thereafter, you can take an income from the remainder at your marginal rate of tax.
The downside to pensions is that they really are sometimes hideously complex to understand. Not so with Cash ISAs though. Like a savings account, you put your money into the account and let the interest do the rest. Of course, these days that doesn’t amount to very much in the way of a return. Added to that, there is no benefit of an employer contribution, nor a tax efficiency on your salary (although you don’t get charged on interest earned).
However, that will become less of a problem when the new Lifetime ISA goes live next year. This new type of account will let you save into it and receive a bonus of 25 per cent for every penny put away – up to a maximum bonus of £1,000. It will be available to those who are 18 years or older (up to the age of 40), and the savings bonus will apply until you turn 50. That means ‘free money’ to the tune of £32,000 could be earned – if you are young enough!
Either way, it’s an attractive option, especially when you consider that withdrawals will be free after you turn 60. Just be careful of withdrawing from your Lifetime ISA early, as charges will apply (unless you are taking the money out for a first-time home, or treatment of a terminal illness).
One option which is growing in popularity is peer-to-peer lending (P2P), which involves lending your savings directly to consumer borrowers via an online platform. Because there is no middleman like a bank, you as a lender can benefit from returns of up to 6 per cent if you’re willing to lend for five years.
There is of course the risk that the borrower doesn’t pay you back, although the platforms typically have pretty robust ways of dealing with risk. Nevertheless, while you probably wouldn’t want to put all your savings into it, P2P lending looks to be a good way to generate a retirement income for yourself at some point, given that you can usually take the repayments from borrowers direct to your bank account each month.
Setting yourself up
It can be a bit daunting to have to learn all the nuances involved, especially if you’re brave enough to look towards the stock market or other forms of investments. But retirement is something that’s worth taking the time to put some careful thought into. We humans are living longer, yet financial support from Government is slowly decreasing. Rather take matters into your own hands, and ensure that you can look forward to your golden years safe in the knowledge that you’re well prepared. It’s the least that you and your partner deserve.