Pension: How to plan early for retirement and avoid being left with a money shortfall

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Pensions can seem like an afterthought or something to be dealt with later in life, but that could not be further from the truth. Planning in advance for post-working life is crucial to maximising one’s living budget in retirement.

To help people plan for their future, Christine Ross, Head of Private Office (North) & Client Director at Handelsbanken Wealth Management has offered her advice.

Start Early

“A critical aspect of retirement planning is structuring your affairs to ensure that you can meet your desired level of income when you stop working.

“With ever-changing pension legislation and increasing life expectancy, it makes sense to use all the tax-efficient options available to create a flexible retirement plan, but probably the most important aspect is to start saving early.

“One insurance company recently published research indicating a 25-year-old would have to save £430 per month to build up a pension pot of £300,000 by age 65.

“Delay pension saving until age 35 and the same pension would cost £630 per month and starting at age 45 would necessitate saving just over £1,000 per month.

“That is simply the benefit of compounding. The earliest savings have the longest period of time to grow.”

Learn to compromise

“Whilst it may appear to be common sense that everyone should start saving for retirement as early as possible, in reality there are competing priorities.

“For someone in their early 20s this may be saving a deposit for a first home, which may also be combined with repaying student loans.

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“Retirement will seem a long way off and much further down the financial planning pecking order. What is needed is compromise.

“For most savers, it is rarely possible to set aside the precise amount calculated to remain ‘on target’ for retirement but this shouldn’t lead to discouragement.

“It is better to save something, however small, rather than simply putting it off completely.”

Take advantage of your workplace pension

“There are limits to how much can be paid into a pension scheme.

“In general, contributions in any one tax year are limited to 100 percent of your UK earnings, or £3,600 if you have no earnings or earn less than £3,600 a year.

“Contributions you make personally can be paid net of basic rate tax.

“The good news is that employers are now obliged to make contributions for their staff, which helps many savers get on the retirement planning ladder.

“Some company pension schemes offer additional ‘matching’ contributions if the employee pays more than the minimum.

“For example, the employer may pay five percent and the employee is required to pay two percent, but the employer may also match additional contributions one for one up to, say another three percent.

“Therefore, if the employee pays five percent the employer will pay eight percent, a total pension contribution of 13 percent. For the employee it is as good as a pay rise.

“Moreover, the money will grow, tax free, in the pension scheme for many years.”

Find the right self-employed pension

“For the self-employed who need to find a pension scheme themselves, there are many low-cost pensions that allow a low level of minimum contribution and do not charge penalties if savings need to be paused for a period.

“There is also the Lifetime ISA (LISA) which is effectively a hybrid savings scheme, allowing funds to be used either towards a first home or for retirement.

“There are conditions attached but this does help to deal with one of the major barriers to pension saving, allowing access to the money for house purchase.

“Pensions offer the most generous tax breaks for retirement saving, but if these, and also the LISA, are too restrictive, then any savings arrangement can be used for saving money for when you stop working.”

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