Saving into a pension may sound daunting.
The consumer group Which? says couples should aim for a pension pot worth £145,000 which, when combined with the state pension, will provide you with an income of £28,000 a year.
This amount would give a comfortable standard of living in retirement, covering basic expenditure as well as some luxuries, such as European holidays, hobbies and eating out.
To get a total pot worth £145,000 if you choose to retire in your mid-sixties, a couple would need to invest £182 a month through a pension from age 20.
For those who put off pension saving until later, £237 a month would need to be invested from age 30, rising to £329 a month from age 40 and £554 a month from age 50.
But every bit adds up. An individual saving £30 a month into a pension from the age of 25 would end up with a total pot worth £54,000 (assuming investment growth of 5% a year), says Cavan Halley of Parallel Wealth Management:
‘Quite simply, the more you can contribute to a pension the better,’ he adds. ‘The earlier you start, the more you can benefit from “compound interest”, which essentially translates as growth upon growth.’
As an example, with a net growth rate of 6% a year, your pension would double every 12 years.
How to choose a private pension
There are many companies offering private pensions. You may see them referred to as a Sipp (Self-Invested Private Pension) or a stakeholder pension.
First, there are pensions offered by insurers or high street banks such as Aviva, Standard Life, Scottish Widows, and Halifax. Monthly payments can be low – starting from £20 a month – and you have the flexibility to stop and start payments as you wish.
With these stakeholder pensions, you select a lifestyle profile and the provider will invest your money on your behalf.
If you want more control over your investments, then a Sipp could be another alternative. Sipps are again offered by many providers. The difference from a stakeholder plan is that you have full choice over how you invest your money. Many people will choose to invest in funds or company shares, although you can choose other alternative investments, such as gold and commercial property.
Sipps are offered by online investment platforms such as Hargreaves Lansdown, Fidelity, Vanguard, and AJ Bell. There are also newer digital players such as Nutmeg, Moneyfarm, Moneybox, and Freetrade.
You can pay as little as £20 a month into a Sipp, and again there is flexibility over stopping and starting payments. You could also pay lump sums on an ad hoc basis, which may suit self-employed people who do not receive a regular salary.
Make sure the provider is registered with the Financial Conduct Authority.
State pension
Anyone who has worked in the UK and paid sufficient National Insurance contributions is eligible to receive the State pension when they reach their retirement age. The amount you get is based on how much National Insurance you have paid over your working life.
Some people who are already retired receive the ‘old’ state pension. Anyone retiring now gets the new state pension, a flat £802 a month. This is reviewed every year and under current rules known as the ‘triple lock’, the Government has promised it will rise by the greatest of wage inflation, consumer price inflation, or 2.5%.
The Government suspended the triple lock last year to save itself a lot of extra money, meaning state pensioners got a smaller rise than the rise in the cost of living.
The new Prime Minister Liz Truss has promised to reinstate the triple lock though, which should mean the full state pension rises by around £80 a month from next April.
Defined contribution/workplace pension
Anyone who works for a company, or part-time or full-time for an individual or family, is automatically enrolled into a workplace pension. Current rules mean your employer must put 3% of your annual salary into your company pension, while personal contributions are set at a default 5%.
However, you can put more than this into your pension and it is also possible to opt out of paying your own contributions. A word of warning: stopping a pension is highly likely to have a seriously detrimental effect on the amount you have when you retire.
Defined benefit/final salary pension
The opposite of defined contribution, this type of pension defines the amount you receive after you retire. The benefit amount is set. However, unless you’ve been working for the same company for a long time, it’s highly unlikely you’ll have one of these.
They’re usually referred to as gold-plated pensions because they promise to pay you a proportion of your annual salary after you retire every year for the rest of your life.
Normally the calculation is around one 60th of your final salary multiplied by the number of years you worked at the company. All public sector workers have final salary pensions, paid for from the public purse.
The Self-invested personal pension, or Sipp
Anyone can set up a personal pension and put money into it to benefit from generous tax relief paid by government. There are different kinds, but most popular is the Sipp.
You decide how much you pay in and how it is invested. Lots of people manage their Sipp themselves, or you can pay for independent financial advice to help you choose a plan that’s right for you.
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