Start planning early

Things you can do to increase your chances of success

The future may seem far away, but you need to start planning early. Regardless of your goals, there are things you can do to increase your chances of success! It is important to look objectively at your plans and adapt them as your priorities change over the years and you go through different life events.

Many of us have got things in mind we’d like to do when we retire, whether it’s travelling the world or simply doing more of what you love. But how can you save enough for a decent retirement without having to give up what makes life good today?

Eagerness to retire
According to research[1], almost three quarters (73%) of people aged 45 or over are longing for the day when their life is no longer confined by their working routine. Yet, despite an eagerness to retire, the research shows that almost half (46%) of over-45s with a pension have no idea how much it is currently worth, and that more women (52%) than men (41%) don’t know the value of their own pension savings.

Shift in lifestyle
A fifth (19%) of those aged 45-plus don’t have a pension in place yet. Two thirds of those aged 45-plus (67%) are hoping for a shift in lifestyle, keen to retire early before the State Pension age kicks in. But only one in ten of them (12%) has proactively increased how much they are investing in their pension when they’ve been able to, in order to help make this happen.

Pension freedoms benefits
Once people reach the age of 55 (age 57 from 2028), they can benefit from pension freedoms which allow them to start withdrawing money from their pension savings if they need to. It’s a point at which some key decisions can be made, and the importance of knowing the value of their pension should come sharply into focus. But, even among this group of people aged 55–64, some 45% still have their eyes shut and don’t know what their pension savings are worth.

Source data
[1] The research was carried out online for Standard Life by Opinium. Sample size was 2,001 adults. The figures have been weighted and are representative of all GB adults (aged 18+). Fieldwork was undertaken in November 2017.

Can you afford to retire?

Pensions can seem complicated, but the basic idea is a simple one. And increasingly, if appropriate, people are turning to private pensions as a tax-effective way to increase their retirement income. Once you’ve decided to start saving for retirement, you need to choose how you’re going to do it. The precise amount you’ll need to save each month to retire at 55 depends entirely on the kind of lifestyle you plan on having in retirement. If appropriate to your particular situation, there are several different types of private pension to choose from. But, in light of recent government changes, the tax aspects require careful planning.

Different pension schemes
The term ‘private pension’ covers both workplace pensions and personal pensions. The UK Government currently places no restrictions on the number of different pension schemes you can be a member of. So, even if you already have a workplace pension, you can have a personal pension too, or even multiple personal pensions.

These can be a useful alternative to workplace pensions if you’re self-employed or not earning, or simply another way to save for retirement. Any UK resident between the ages of 18 and 75 can pay into a personal pension – although the earlier you invest, the more likely you are to be able to build up a substantial pension pot.

Pension-related tax relief
A private pension is designed to be a tax-efficient savings scheme. The Government encourages this kind of saving through tax relief on pension contributions. In the 2018/19 tax year, pension-related tax relief is limited to either 100% of your UK earnings, or £3,600 per annum. If you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.
Basic rate taxpayers will receive 20% tax relief on pension contributions. Higher rate taxpayers also receive 20% tax relief, but they can claim back up to an additional 20% through their tax return. Additional rate taxpayers again pay 20% tax relief, but they can claim back up to a further 25% through their tax return. Non-taxpayers receive basic rate tax relief, but the maximum payment they can make is £2,880, to which the Government adds £720 in tax relief, making a total gross contribution of £3,600.

Tapered Annual Allowance
The Annual Allowance is the maximum amount that you can contribute to your pension each year while still receiving tax relief. The current annual allowance is capped at £40,000, but may be lower depending on your personal circumstances.

In April 2016, the Government introduced the tapered annual allowance for high earners, which states that for every £2 of income earned above £150,000 each year, £1 of annual allowance will be forfeited. The maximum reduction will, however, be £30,000 – taking the highest earners’ annual allowance down to £10,000.

Overall tax liability
Any contributions over the annual allowance won’t be eligible for tax relief, and you will need to pay an annual allowance charge. This charge will form part of your overall tax liability for that year, although there is the option to ask your pension scheme to pay the charge from your benefits if it is more than £2,000. It is worth noting that you may be able to carry forward any unused annual allowances from the previous

Think pensions are only for ‘older’ people?

Retirement might seem a long way off, so it’s easy to understand why saving for retirement isn’t a priority in your 20s – a decade when advancing your career, not planning for the end of it, seems more important. But, youth is a huge advantage when it comes to building wealth for retirement because it gives you time to maximise from the power of compounding.

As soon as you start working, it’s time to start thinking about pension and retirement planning. Think you’re too young to start a pension? Think you’ve got plenty of time before you need to plan your retirement? Think pensions are only for ‘older’ people? You can probably find plenty of reasons not to save money. But, making the most of the early years of your career is one way to achieving your retirement savings goal, and probably the easiest.

Boost your contributions 
It’s important to plan for the day that you eventually stop working as soon as you can. While you can’t usually touch the money in your personal or workplace pension until you reach the age of 55 (rising to 57 by 2028), one of the best aspects of pension saving is the boost your contributions receive from tax relief, or a refund of the tax you’ve paid.

You’ll receive tax relief at the basic rate of 20% on contributions made to personal and workplace pensions. So, for every £80 you pay in, the taxman will top it up to £100. If you’re a higher or additional rate taxpayer, you can claim back up to an additional 20% or 25% through your self-assessment tax return. If you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

Valuable company benefits
Company pension schemes often provide one of the best ways to save for retirement, as employers also usually make contributions on your behalf. Given that the Government tops up your contributions too through tax relief, boosting the amount in your pension pot, this makes them one of the most valuable company benefits available.

Under the Government’s auto-enrolment scheme introduced in 2012, if you’re at least 22 years old and earn more than £10,000, your employer will have to automatically enrol you in a pension scheme into which you and they must contribute. You can opt out if you want to, but if you do this, you won’t benefit from your employer’s contributions.

Enhance retirement savings
If you don’t have access to an employer’s pension scheme, perhaps because you’re self-employed, you can still contribute to a personal pension and benefit from tax relief on your contributions. Pensions aren’t the only way you can save for your financial future. Some people choose to use their Individual Savings Account (ISA) allowance (which is currently £20,000 in the 2018/19 tax year) to enhance their retirement savings.

Unlike pensions, there’s no tax relief on the money you put into ISAs, but you can access your savings whenever you like. It is now also possible to withdraw ISA funds and repay the contribution in the same tax year, without the replacement counting towards your annual ISA limit. However, you need to consider that while an ISA may be flexible, if you sell investments to withdraw cash, you may not get the best available returns and could potentially increase the risk of loss compared to remaining invested over the long term.

Tax-efficient returns
All gains and returns are tax-efficient with both ISAs and pensions, but once you’ve take the tax-free cash from your pension, the rest will be subject to Income Tax as you draw an income or lump sum. All withdrawals from ISAs are tax-free. Over the long term, investment ISAs may provide the potential for greater returns than cash accounts.

In April 2017, the new Lifetime ISA (LISA) launched to encourage people aged under 40 to save for their first home or their retirement. You can save up to £4,000 a year from your ISA allowance into a LISA, which will be supplemented by a government bonus of 25% (up to a maximum of £1,000 a year) up until age 50.

Government bonus, interest or growth
Funds held in a LISA can be used after 12 months of account opening to buy a first home valued up to £450,000. Alternatively, after your 60th birthday, you’ll be able to take out all your savings from your LISA tax-efficiently for use in retirement. A LISA can be accessed like a normal ISA at any time for any reason, but if not used as above, you’ll lose the government bonus and any interest or growth on this. You’ll also have to pay a 5% charge.

You can split your allowance between a cash, investment, innovative finance and a lifetime ISA if you want to, and all gains will be free from Income Tax, tax on dividends and Capital Gains Tax. However, with a LISA, you can only pay in up to £4,000.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.