Retirement – days filled with coffee catchups, green fingers, rounds of golf, an early evening pinot, a last-minute holiday. Whatever you hope for in your retirement days, it above all means more time to indulge in the things you love. But are you financially prepared for a salary-free lifestyle? If not, maybe it’s time to think about building up the savings pot.
A recent survey by financial technology firm EV found nearly half (49%) of UK adults would like more help in understanding the necessary savings for a comfortable retirement. It found younger adults aged between 18 to 34, in particular, 79% in fact, wanted more advice. But a significant 58% of adults between 35 and 54 were also in need of more education and 20% of those closest to retirement age, at 55 and over, still aren’t entirely confident in the amount of savings they’d need to retire comfortably.
The importance of retirement savings
Financial planning at all stages in life can help with financial stability, independence and peace of mind. When planning for retirement, we also need to consider a drop in income while still wanting to manage outgoings, potentially big payments like a mortgage, as well as maintaining a level of lifestyle we can enjoy. The sums can feel overwhelming, many of us can then feel hesitant to get the ball rolling on retirement planning and savings, but the truth is the sooner you start planning for your savings at retirement, the less financially overwhelming it will most likely feel.
Saving consistently for retirement gives you added income and ensures you won’t have to rely solely on a state pension.
The benefits of early retirement savings
Starting your retirement savings early can significantly boost your financial security later in life. The sooner you start, the more time your money has to grow through the power of compound interest. This, in simple terms means, that you earn interest on interest. For example, in year one, money invested into your pension will earn interest (a return). In year two, interest will be earned on money invested plus year one’s return. In year three, interest will be earned on money invested plus year one and year two’s return, and so on. Meaning the sooner, you start your pension the more you’ll get to benefit from compounding interest.
Knowing you’re saving for the future can also give you peace of mind, reducing feelings of uncertainty and stress and allowing you to enjoy your working years without the looming worry of financial instability in retirement. It could even allow you greater financial freedom and flexibility in retirement or mean you can finish your working life sooner.
Recent Hodge research found emergency savings are on the rise, indicating that many people are taking proactive steps to safeguard their financial well-being during the cost of living crises. Saving towards retirement is another way of ensuring you have a buffer against unexpected costs, which is important when you no longer have a regular salaried income.
How much should I save for retirement?
How much to save will differ for each person. What type of lifestyle you want and how much you can afford to save will influence the amount you aim towards saving in your pension pot.
Some financial experts recommend saving 10 times your final salary and planning to live on 80% of your pre-retirement income. For example, if your annual income at retirement is £50,000, you would need about £40,000 annually to sustain a comfortable lifestyle. This amount might vary based on other income sources such as state pension, part-time work or personal factors like health and lifestyle desires.
Another recommendation is to save approximately 15% of your annual earnings. In an ideal situation, you’d start saving in your 20s and build up your retirement pot consistently throughout your working years.
As everyone’s financial circumstances vary, its best to get individual pensions advice. You can speak with a professional financial advisor. Visit unbiased.co.uk for a list of regulated advisers. There’s usually a charge for getting advice.
How can a pension plan help me save?
Contributing to a pension, as opposed to putting money in a regular savings account, is a good option if you’re saving for retirement. A pension is like having a long-term savings account with tax-relief, designed to be accessed in later life. You can only access your pension when you retire and not before the age of 55, so you can’t dip into it like you can with some savings accounts.
If you’re part of a workplace pension scheme, both you and your employer can add to your pension pot throughout your working life. If not, you can open a Self-Invested Personal Pension (SIPP). In both cases, the government will top up your pension in the form of a tax refund. The amount you receive depends on your income tax bracket.
You can read more about opening a pension or savings account here.
Planning for retirement with Hodge
If you’re working towards building your pension pot, be aware that a pension will always perform better than a savings account due to the tax relief you will receive. However, it can be a good idea to also have some money in an accessible savings account for those unexpected outgoings life can throw up. So, you can consider a blend between the two as the right fit for you.
An easy access savings account, or a longer-term fixed rate ISA or fixed rate bond savings account can help you work towards your financial goals. If you’re thinking about opening a savings account, you can find Hodge online rates for fixed rate bonds and ISAs here. Alternatively, if you’d prefer to speak to our friendly team about our savings products, phone: 0800 328 0746. We’re here to help you in your moments that matter.
For individual pensions advice, speak with a professional financial advisor. Visit unbiased.co.uk for a list of regulated advisers.
This article is correct at time of publishing and for general information purposes only.