With the base rate low and inflation high, saving for retirement in the current climate is challenging but by no means impossible. The best way to steer through the lean times is by learning to understand the financial markets better and making certain that you review your plans on a regular basis. This is the soundest method of ensuring that you are on track to secure the income you are expecting to receive for retirement.
Government estimates for the UK in 2009 showed that people who turned 65 in 2008 ought to have a life expectancy of at least another twenty years. Not only that, life expectancy is anticipated to get higher. The upshot being there is every chance that you could be living on your retirement income for a very long time. There is no getting away from the fact that whilst the economic climate is not doing you many financial favours right now it has to be you that is the driving force in maximising your savings for your retirement. Here's our recommendations for planning your nest egg...
Establish a goal
The two major questions that determine how and where you save for your retirement are: (a) When do you want to retire? and (b) how much do you hope to live on? Only when those questions are answered can you take stock of your position today, consider how much longer you have to save/invest and get an idea as to where you want to put your money. It goes without saying that the longer you keep working the more time you have to save and, conversely, the earlier you retire the more money you will need.
How much money you would like to live on or need to live on will depend on circumstance: will you be mortgage-free at that point? Do you anticipate any major expenditure (children's weddings etc)? Alongside this you need to think about your day-to-day spending patterns: certain costs will disappear (work transport costs as an example) and new costs will be added (energy bills will inevitably rise and leisure outgoings will also increase).
If you consider that your retirement will last at least twenty years then you may want to account for staggered spending; it may be lower in the first half of retirement and greater at the end of retirement - remember that if residential costs are needed these can often be very high.
Consider you current position
Next on the agenda is to determine your current situation:
- What's the current value of your existing pension if you have one (your employer should be able to give you more information) and what will the expected income from that be?
- Do you have an old pension scheme that you have lost track of? If so, the pension tracing scheme can help you.
- How hard-working are your current savings plans and do you need to work them harder? Take a look at our savings comparison tables to see if they measure up against the current offerings.
- What's the current value of any assets that you may want to realise at time of retirement (i.e downsizing your home)?
It's also worth looking at what you would get from the state as of today to give you some idea of what you may be entitled to at the point of retirement. Check the pension service website but remember: any number of changes to the state scheme can take place before you retire.
Consider the options
How many years you are away from retirement and your current financial position will help you determine how risky you want to be with your savings to the point of retirement. If retirement is a reasonable distance away you will also want to take in to account what effect inflation may have. Advisors often recommend younger savers to invest their retirement savings in equities because although they are higher risk, they are likely to return more over the long term. Conversely, older savers are told to transfer their pension pot to safer, fixed income products. Unfortunately, there is no perfect solution for where to put your money for later life. There are many different options and, although a cliché, it's not a good idea to put all your eggs in to one basket. Diversification of your money is crucial and having money in various financial corners cannot be thought of as bad advice. Here are the top options to consider...
ISAs have got to be high on your list of savings options for retirement. If you haven't done so already you simply must open a cash ISA and, if you can, fill your cash ISA account to the max (that's £5,640 for tax year 2012/13) as soon as possible. Why? Because the interest paid to you in your cash ISA is tax free. As a legal requirement - all banks & building societies are obliged to deduct tax from your interest before it's paid over to you in all other savings accounts but not so in your cash ISA. The full 100% interest is yours to keep. And, as long as your interest rate is beating inflation, they are completely risk free. You also don't have to declare them on your personal tax return. You can view our ISA comparison table here.
You have a number of options for the type of accounts to consider when saving for your retirement. Fixed-rate bonds (sometimes known as term accounts) allow you to leave your money in for one year or more (the term). There is often a minimum deposit eg £1,000. And as long as you don't withdraw during the term you shouldn't receive any form of penalty. Fixed rate savings accounts give you a fixed rate of interest on your money, paid for a fixed length of time. The best fixed rate accounts do tend to have higher interest rates than the best variable rate savings accounts and because you are saving for retirement there should be no need to want to withdraw your money early. However you do take the risk that having locked your money away, you can't then get at it if rates start going up. If you like the certainty of knowing what interest rate your money is getting, then a fixed rate account would be a good option for placing your retirement money. You can view our fixed rate bonds comparison table here .
In addition to a fixed rate account you may also want to consider a high interest regular savings account. These accounts are ideal if you are happy to commit to a regular monthly savings amount - which for some accounts can be as little as £5. The account has been created to stimulate people in to habitually saving and if you're saving for the long term this is the best way to do it. Often the bank that holds your current account can offer a slightly higher rate of interest if you set up a standing order or direct debit to pay the money in each month and an annual bonus. There may be penalties however if you stop paying in regularly so it is vital that if you do decide to opt for this kind of savings scheme - you are able to commit to the agreed savings amount. Usually, interest is only paid yearly, and you can only withdraw yearly. The real downside for retirement savers is that there is usually an upper limit as to how much you can pay in (which is why the providers can offer a higher rate) which is why we would recommend spreading your savings in to multiple accounts with a High Interest regular savings account being one within your portfolio.
You may also want to consider offshore savings which will offer a range of options, many of which are not available to standard savings accounts. Interest on offshore accounts is paid gross without any tax deductions and therefore can be very appealing. Offshore savings accounts can generally be accessed by the standard methods including online. Some offshore financial institutions are not covered by the UK Financial Services Compensation Scheme so do ensure that you check first. You can view our offshore savings account comparison table here .
The first thing to do is discover whether you have a pension scheme at your place of work - if there is, it's probably worthwhile joining it. If you're already a member of your employer's scheme, think about making additional contributions to boost your pension. Your employer will be able to give you more information or if not point you in the right direction. In addition, you could also think about saving in a personal pension scheme or stakeholder pension, these are widely available from financial firms, such as insurance companies.
Before even considering investment as an option for retirement you really should have already built & spread your savings (in ISAs, Fixed Term Accounts, Instant Access Savings), covered yourself from unexpected events (life insurance, critical illness insurance) and also have your pension in place. There are different types of investment. Each has its own level of risk but, basically, you take a risk with your money by investing in assets, which could rise or fall in value, in the calculated hope of getting higher returns on your money, especially over the longer term. Think about why you want to use investments as a tool for retirement; is it that you want to increase growth or alternatively do you want an investment to provide extra income. Take a look at our comparison tables to see if they measure up against the current offerings. Whichever investment plans you decide to go for it's always advisable to spread your risk. You can view our investment plan comparison table here .
If you plan to use your own property to fund your retirement two options on the table are (a) downsizing (b) using an equity release firm. If considering the latter then taking independent advice would be advisable.
Over 50s Life Insurance
Another area of consideration when thinking about retirement is your life insurance. If you already have life insurance in place then so much the better but if not then now is most definitely the right time. Getting life insurance as you get older gets harder (and often the premiums get higher). Typically, a simple no frills policy is best suited if you fall into the 'Over 50's' category. At the very minimum, it is advisable to obtain a life insurance policy that will cover the cost of your funeral and burial expenses. This way, your loved ones will not be burdened with the cost when you do pass away. You can select from term life insurance or whole life insurance. If you want to know the difference between the two then click here.
While term life insurance usually costs less to purchase, you may find it difficult to obtain coverage again when the length of your term expires and you are much older in age. It is more practical to consider a Whole of Life policy. Many insurers have a fixed price for all term lengths but some increase premiums with age. Therefore, you must carefully consider both types of policies and weigh the pros and cons of each in order to determine which is best for you. Take a look at our current market offerings to the over 50's by clicking here.
Tip: For more advice on saving for your later years click here to order your FREE top 10 retirement tips brochure.
Author: KYM Editor