A millennial’s guide to retirement
An unexpected consequence of starting this role six months ago is that people now openly talk to me...
The new state pension’s maximum amount is £155.65 a week¹. It may be just enough to cover the basics (depending on your housing situation), but it’s not going to stretch to many luxuries or cover unexpected costs. Plus who knows what it will be in 20 or 30 years’ time? If you’re hoping to retire with a little more income, you need a ‘plan B’.
These three steps could make a huge difference to your money over time.
If you wake up the day you turn 50, suddenly panic about your pension and invest £100 a month for the next ten years, you’ll have £15,499², assuming average annual returns of 5%. (Not bad, and definitely still worth doing if you can, but not the best strategy if you do have the luxury of time.)
If you wake up the day you turn 30 and (providing you’re not too hungover!) commit to putting half that amount—just £50 a month—into a pension pot every month until you turn sixty, you could end up with £41,000³, on 5% annual returns.
How to do it: With interest rates on cash savings accounts so low, you may want to consider investing for your retirement in a self-invested personal pension (SIPP). Regularly investing a small sum across a selection of high quality funds can be a good way to get a diversified portfolio. Browse our Elite Rated funds or visit our sister company Chelsea Financial Services to peruse SIPP products.
Actually, you don’t even have to make your boss pay – the government is doing it for you! Automatic enrolment has now been introduced, which means all eligible employees must be enrolled into a workplace pension scheme. You can opt out, but if you do, you may be giving up ‘free money’ from your employer.
How does it work? Basically, the workplace pension scheme aims to get both you and your boss saving for your retirement. At the moment, a minimum 2% of your salary must be saved – your employer puts in at least 1% of that and you make up the remaining amount. The scheme is being phased in over the next few years, so that from 1 October 2018 the total minimum contribution will be 8%, with employer-mandated payments of at least 3%. It’s also worth noting your boss may be offering another pension plan that is even better than the mandatory scheme, so be sure to ask about your options.
If you’re going to regularly invest small amounts, you may want to avoid SIPP providers that have transaction charges – you don’t want to be lose a few pounds in fees every time you save £50 towards your retirement. Also on the subject of reducing fees, remember that each pension product you hold will be charging you something. If you’ve worked quite a few places (and therefore have quite a few pensions), this could really detract from your savings. Your preferred provider may be able to help you roll everything in to the one account.
What to look for: Different SIPPs have different charging structures that will suit different types of investors, but for the slow-and-steady saver it may be a good idea to look for a SIPP with just a low-cost annual management charge and either no, or a low, minimum initial deposit to open the account. FundCalibre’s sister company, Chelsea Financial Services, offers a SIPP product and has a dedicated pensions administrator who can talk you through the process and provide ongoing support.
¹New State Pension, maximum amount correct as of 13/09/2016. According to www.gov.uk.
²£100/month, 10 years, 5% annual returns, compounded yearly. Calculated via The Calculator Site
³£50/month, 30 years, 5% annual returns, compounded yearly. Calculated via The Calculator Site