1. Join your company pension scheme
If you’re not yet part of your workplace pension scheme, it’s a good idea to consider joining voluntarily. Most companies will add to your contributions and some will match them, helping you build a decent pension pot from early in your career. Even if you choose not to join, it’s likely you’ll soon be signed up under a new ‘automatic enrolment’ law, under which companies will be forced to contribute to their employees’ pensions.
The largest companies had to enrol all employees in 2012 and the law is gradually being rolled out to all smaller employers by 2018. It applies to all UK workers aged 22 and above, earning more than £10,000 a year. You can find out more on how you’re likely to be affected here. But you won’t be automatically enrolled if you’re self-employed or the sole director of your own company.
2. Contribute as much as you can afford
It can be difficult to find spare cash at the end of the month to make a contribution to your pension – especially in your 20s while your earning power is limited. But even a few pounds a month can make a significant contribution to the final pot, especially if you have an employer who will also contribute. They will have to do this when you join a workplace pension scheme.
There are many rules of thumb about how much you should save for retirement, but one of the most popular is this: take the age at which you start saving for retirement and divide it by two, then turn this figure into a percentage. That’s the share of your net income you’ll need, in theory, to contribute to your pension in order to retire ‘comfortably’.
Of course, this can only be a rough guide – the size of your pension pot will depend ultimately on the performance of the investments inside, and what is comfortable for one person may not be acceptable to another. Still, it raises an important point: the longer you wait before saving for retirement, the more effort you’ll have to make to get the same overall result. If you followed the rule to the letter then you’d only have to contribute 12% of your net income if you started saving at age 24, but you’d have to contribute 17% if you started saving 10 years later.
3.Consider a stakeholder pension, personal pension or SIPP
If you’re concerned about pension provision but can’t join a workplace scheme, don’t despair – there are alternatives.
With stakeholder pension you pay money to an insurance company, bank or building society to invest on your behalf. Annual fees are capped at 1.5 per cent of the fund’s value for the first 10 years and one per cent thereafter. However, they may offer relatively few investment options.
Personal pensions typically offer a far wider choice of investments and the flexibility to contribute more when you can afford to and less if times are tight. The downside is that they tend to be more expensive.
A Self-Invested Personal Pension (SIPP) is a pension in which you can hold various investments including shares, investment funds and less common choices such as commercial property. They give you wider investment options than personal pensions, and can therefore be a good option for experienced investors who want greater flexibility than is available elsewhere, and who are comfortable with the risks that self-investing involves. However, the charges on SIPPs can be higher than for personal pensions and stakeholder plans. You will need to ask yourself whether you will actually invest in the wider investment options offered by SIPPs. If not, a personal pension or stakeholder may be a better choice.
4. Ask yourself if now is the time to accept more risk
Generally speaking, you’ll give yourself the opportunity to earn higher returns if you’re willing to take higher risks – and to leave money untouched for longer periods of time. So now’s the best time in your life to think about investing.
As you get closer to retirement you’ll probably want to transfer more of your money into lower-risk investments. That’s because you’ll have less time to recover losses if you keep more of your wealth in higher-risk investments and things go wrong.
In your 20s, by contrast, you’ve got much more time to recover losses – even if the markets don’t go your way. Those who invested in the UK stock market for any 18 consecutive years between 1899 and 2013 achieved higher returns than those who invested in cash or UK government bonds over the same period.
You should remember, of course, that such performance can’t be guaranteed in the future. But the point to remember is that you’ll never get a better chance to achieve high investment returns than by starting early!
5. Remember that pensions aren’t the only way to save for retirement
Individual Savings Accounts (ISAs) also offer a tax-efficient way to build savings, not only for short-term goals but also over long periods. Unlike pension savings, they don’t offer tax relief on the investment you make, but you won’t have to pay any income tax on withdrawals. They are also more flexible than pensions in that you can access your funds earlier. For more detail on which type of investing account might be right for you, see our article entitled ‘Investment account types: what’s available and which is right for you ?’
As with any investment, value may fall as well as rise, and you may not get back what you put in.