Act now and you could retire early
Picture the scene: It’s 7am and you’re heading to work on an overcrowded train. Next to you, there’s an umbrella dripping all over your lap. Perhaps you start wondering if it’s time for a new job. Or do you start daydreaming about the day you can leave the working world? Lie-ins, long holidays and neglected hobbies finally getting your full attention...sounds good, doesn’t it?
Retiring at 55 years old is simply a question of whether you can afford it. But unfortunately, turning that dream into a reality doesn't come cheap. Once you’ve paid off your mortgage and any other debts, like it or not, the answer will likely depend on what shape your pension is in.
The good news? We’ve got seven ways to get your pension into the best possible shape to maximise your chances of retiring early. Read on to discover:
1. The taxman gives £38 billion to pension savers - claim your share
Did you know that when you pay money into a personal pension, the taxman pays in too? Half of British adults had no idea.
For instance, they didn’t know that to contribute £1,000, you pay £800 and the government adds £200 on top.
All UK residents under 75 receive 20% basic rate tax relief when they contribute up to what they earn into a pension. This is claimed by your pension provider and automatically added to your pension pot.
Higher-rate taxpayers can claim back up to a further 20% through their tax return - that’s another £200 in this example. Whilst 45% taxpayers can reclaim up to a further 25%: £250 in the example, reducing the effective cost of a £1000 contribution to as little as £550
Yet, it has been estimated 180,000 40% and 45% taxpayers forget to claim their extra tax relief and miss out on over £200 million. If this is you, there is good news. You can write to your local tax office up to four years after the end of the tax year in which you made your contribution to reclaim the tax relief.
Normally, the taxman takes. So why not take advantage of the rare occasions when the taxman gives?
Please note: the exact amount of tax relief depends on your individual circumstances and you must pay enough 40% or 45% tax to claim the full amount. Whilst the tax benefits we refer to are those that currently apply, they can change over time and their value will depend on your circumstances. Correct as at 6 April 2017. Remember the earliest you can access money in a pension is age 55 (57 from 2028).
Tax relief calculator
Find out more about this valuable tax break.
Most people can contribute as much as they earn to pensions. A £40,000 annual allowance also applies, although this can be as low as £10,000 for some high earners with ‘adjusted income’ over £150,000 or £4,000 for people who have flexibly accessed a pension. The lifetime allowance is £1m. These limits can be affected by other factors – find out more here.
2. Start a pension ASAP
There’s a famous investing mantra, derived from a Chinese proverb, which says:
The best time to start investing was 20 years ago. The second best time to start investing is now
It may sound blatantly obvious, but sometimes the blatantly obvious is overlooked.
One in seven British adults retiring last year didn’t have a pension, and women are more than three times as likely as men to retire without a pension. That’s all very well…but how much should you save?
Find your magic number
There's a very rough rule of thumb to follow in order to find the ‘magic number’ for a comfortable retirement.
Take the age you start saving into your pension, and divide by two. Then put this percentage of your pre-tax salary aside each year until you retire. Don’t forget to include your employer’s contribution in that percentage.
For example, if you're starting a pension at 30 years old, you should be aiming to save 15% of your earnings each year. To retire at 55 you'll need to save more, but the earlier you start, the less it should cost you to build up a decent pension.
Is your current pension the right one for you?
No online access or mobile app? Paper statements only once a year? A limited investment choice? If you find your current pension lacking, you may want to consider a pension that gives you the tools you need.
The Vantage SIPP (Self Invested Personal Pension) is a type of personal pension that lets you choose your own investments and manage it in the way that works best for you.
Please remember pensions are long-term investments to fund your retirement; you cannot normally access your money until age 55 (57 from 2028), up to 25% usually tax free and the rest taxed as income.
If you are unsure the Vantage SIPP is suitable for your circumstances, please contact us for advice.
Guide to SIPPs
From the pros and cons, to how the tax rules work and getting started, find out all you need to know about SIPPs.
3. Don’t ignore your workplace pension
As part of the government's automatic enrolment programme, millions of workers are being automatically enrolled into a workplace pension by their employer.
Once you’re enrolled into the pension, not only will you pay in, but so will your boss.
Saving into a workplace pension is easy - because you don’t have to do anything! That’s why it’s automatic.
Some people may opt out of their workplace pension, but remember, if you opt out, you could be missing out on 'free money'. Your employer's contributions are just a helping hand - you will still need to make your own contributions in order to retire early.
4. Choose the right investments
Do you know how much money is in your bank account? I imagine you have a pretty good idea. It's perfectly natural, after all, it’s where our salary goes in and our day-to-day spending goes out.
But do you check the value of your pension anywhere near as often?
Perhaps you’ve never checked it at all. Some pension providers don’t offer online access, and only send a paper statement once a year. Do you know where your pension is invested?
And this is pretty important. Because the better your investments perform, the bigger your pension pot.
A good investment can be the difference between working into old age and an early retirement.
And the first step to choosing the right investments, is knowing where your pension is invested in the first place.
Not all investments are the same and the impact on your pension could be significant. Please note: some pensions restrict your investment choice. Our SIPP lets you choose from over 2,500 funds, shares, investment trusts, and many others.
Our research shows that those people who choose their own investments, instead of relying on the default option, have beaten the average default fund by 4.9% every year. All investments fall in value as well as rise, and please remember past performance is not a guide to future returns.
Investment ideas for your SIPP
The latest ideas from our experts, plus the most popular funds this month.
5. Make small increases, regularly - they can go a long way
If you had £4.50 less to spend each month, would you miss it?
That's less than the cost of a take-away, but it could go a really long way in your pension.
Look at this example:
John is 30 and contributes £150 (net) to his pension every month. If every year he increases that amount by just 3% (£4.50 a month for the first year), at age 65 he could find himself with an extra £90,433 in his pension, assuming John gets basic tax relief and the fund grows 4% a year after charges.
Never mind takeaways: this should pay for quite a few fine dining meals!
Think how much more could you get if you increased your contributions by just 3% every year?
Of course, these are just illustrations; the actual return could be less or more than this. The figures show the values in today's terms, without considering inflation, which will reduce the spending power of money over time. Moreover, investments are not guaranteed: they can go down as well as up in value so you could end up with less than you invested and the tax relief mentioned depends on individual circumstances, reflects today's tax rules and may change in the future.
If you're thinking about topping up your pension, remember: there are rules and restrictions to how much you can contribute per year and the value they can reach over a lifetime without incurring a tax charge.
If you're unsure, please ask your pension provider.
6. Track down any old pensions
Fewer people are staying with the same employer for life. In fact, the average worker will have 11 different jobs in their lifetime.
That’s potentially 11 different company pension schemes to keep track of and unsurprisingly, people are struggling. This is evidenced by the estimated £5 billion sitting in lost pensions.
If you remember joining an old company pension scheme, but don't have the details to hand, you can track them down for free with the government’s free Pension Tracing Service.
The simplest and most effective way to keep track of old pensions, is by moving them all under one roof.
After all, isn’t one pension just…easier?
The government's free Pension Tracing Service could help you to locate lost pensions.
Call 0345 6002 537 or use their pension tracing service
7. Act now - time is on your side
4 in 10 Brits believe they will never be able to retire. That’s a scary prospect. But what they might not realise, is that they have time on their side, and time has a way of making investments grow, through something called ‘compound interest’.
If you imagine compound interest as a snowball, rolling down a steep hill, picking up more snow as it rolls and growing bigger in the process. The longer the snowball can roll (i.e. the bigger the hill) then the bigger the snowball will become.
The same goes for your investments. And the sooner you can get that ball rolling, the better it is for your pension in the long run - It’s all about preparation.
Einstein is said to have called compound interest the eighth wonder of the world, and we'd tend to agree.
He who understands it, earns it…
He who doesn’t, pays it.
Whilst we might romanticise our dreams of an early retirement every now and then, in truth, without the right preparation, the reality can be quite different.
But if you act now, and follow these seven ways to get your pension into shape, then the retirement dream stands more chance of coming true.
Your actions today could be the difference between standing in that overcrowded train and relaxing in the sunshine on that holiday you just don’t need to rush back from.
Seven pension facts
Take control and build a bigger pension with these lesser-known pension facts
Could you take a step closer to early retirement?
Self Invested Personal Pensions (SIPPs) have transformed how an estimated 1 million investors are saving for retirement.
Could a SIPP help you retire early, too?
I have transferred various pensions to my SIPP at Hargreaves Lansdown. I must say I have received an excellent service by phone and by email. All the hassle was taken from me by HL and made my life a lot easier. Also dealing in funds online and switching is straight forward.
Mr Bhudia, Middlesex
A SIPP is a type of pension for people happy to make their own investment decisions. Investments go down in value as well as up so you could get back less than you invest. This website is not personal advice, if you are unsure an investment is right for you, please seek advice.