For most of us, the whole point of saving and investing is to bring closer the day when we can quit work and settle in to a long and comfortable retirement.
But that task is not getting any easier. It’s good news that we’re all living longer but it means we also have longer retirements to plan for. The decline of generous ‘final salary’ style pensions also means workers face greater uncertainty about their income in retirement.
Despite all of that, however, there’s plenty you can do to improve your retirement prospects. Will it be enough to retire 10 years early? In reality that is a steep challenge for anyone, particularly if you want to maintain your lifestyle after you stop work.
But it’s not a bad goal to have in mind because, by attempting to meet it, you are likely to dramatically improve your retirement prospects. Whether that enables you to retire early - by 10 years or a more modest period - or whether it simply translates into a richer retirement, it will be worth the effort.
Here’s what you can do.
The most powerful tool available to any investor is completely free - time. Compounded returns, getting interest on your interest, is what can turn modest savings into something worthwhile, but the process needs time.
Even if you worry the money you’re able to save is too small to make a difference, remember that saving and investing is a habit - once you start, you’ll be in a position to do more.
Get help off the tax man…
If you’re saving for retirement a pension is likely to be the best place to do it because your contributions benefit from tax relief. A boost equivalent to any basic-rate tax paid is automatic, while the extra available to higher and additional rate payers is either added automatically or else claimed through a self-assessment tax return.
A good way to look at it is that it costs a basic-rate payer £80 to make a £100 pension contribution, while a higher-rate taxpayer pays just £60 for the same effect and an additional-rate taxpayer pays just £55.
Contributions are allowed to build tax-free and then 25% of the pot can be taken with no tax due and income tax payable on the rest. The biggest benefit comes when your tax rate in retirement is lower than in your working life.
… and your boss
People who work for a company can usually benefit from an employer paying into a pension for them. Some employer contributions may be automatic but beyond that you may be required to make contributions which are then matched by your employer. Ask the administrator of your scheme what it would take to maximise the help on offer.
Keep an eye on cost
Investing fees can make a big difference. Just like your investment gains, the effect of fees is compounded over time and even a difference of less than 1% a year in your overall costs add up to a big difference over years and decades.
Understand what percentage amount you are paying in fees and drive this down where you can.
Managing your retirement saving - including the cost - can be easier when you bring all your pensions together in one place. You’ll need to check that transferring a pension won’t lead to valuable benefits being lost but, if there is no extra cost, having pension savings in once place means you’ll be better placed to increase contributions or change investments in order to keep your plans on track.
Set a target
If you really are trying to save enough that you can retire a decade early, your retirement fund target has to be very ambitious. But even those with more modest aims should make targets and Fidelity’s retirement savings guidelines provide a set of simple ‘rules of thumb’ to show you whether you’re on track.
If you have to suddenly start diverting a large share of your salary into a pension, it will be painful. If you start with a more manageable proportion, and increase this over time, it’s a lot easier to bear.
Start with an amount you can handle and aim to steadily increase it. Even quite small increases add up over time. For example, a 30-year-old earning £30,000 could contribute an extra 1% of their salary and then retire at age 68 with an extra £55,345 in their retirement fund.1 Used wisely, that money could fund a year or more of retirement on its own.
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944. Fidelity's Retirement Services also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
More on saving for retirement
1Fidelity, based on salary growth of 3.75% each year and investment growth of 5% each year.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Withdrawals from a pension product will not be possible until you reach age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.