How to save for your future - 20-39 year olds
How do you picture your retirement - travelling the globe? Living by the seaside and enjoying the sun?
Sadly, millions of people will find such a comfortable existence out of reach, unless they start saving more into their pension.
Four in 10 people are not saving enough for their retirement and two in 10 are not saving anything at all, according to research from AXA.
Andy Zanelli, head of retirement planning at AXA Wealth, says: "Rising longevity means retirement is likely to be longer than ever before. Planning ahead and taking control of your financial future as early as possible is vital."
The good news is that it is never too late - or too early - to begin saving for the future. We explain how to get started whatever your age.
Age: 20 to 39
Saving as early as possible into a pension makes a huge difference to the size of your pot. So if you are offered a workplace pension, it's a good idea to accept. Most employers will also contribute to your pension, so turning it down is like saying no to free money.
You also get tax relief when saving into a pension. This means that if you are a basic-rate taxpayer, for every £80 you put in, the state will top this up with another £20.
Experts recommend investing 10% of your income or as much as you can afford - especially if your employer matches your contributions.
If you start at age 22 and save 10% of your £26,000 salary, and you achieve 6% investment growth, you end up with a healthy £523,000 pot when you retire. If you left it to age 30, you would accumulate £313,000, while those waiting until age 40 would get just £156,000, according to Hargreaves Lansdown.
Once you've opened your pension, read your annual statements carefully. Most people simply opt into the default "balanced managed" fund and then stufftheir statements unread into a drawer. But experts say that taking more of an interest in your pension, and having the confidence to switch funds if necessary, is vital.
Do not be alarmed if the value of your pension pot drops one year. Markets will fluctuate but investors need to remember that they are in it for the long term.
If you don't like the idea of being unable to access your savings until age 55, consider opting for a stocks and shares ISA instead of a pension. This allows you to save up to £11,520 a year, with no tax to pay on income payments or growth in the value of the investment.
However, unlike pensions, while ISAs are taxefficient when you come to draw your money, you are taxed on the money first put in. In short, pensions are tax-efficient when you put your money in and ISAs are tax-efficient when you take your money out. Experts recommend having a mixture of both.
Laith Khalaf, pension investment manager at Hargreaves Lansdown, says: "At this age [20s and 30s] you can afford to have 100% of your pension invested in equities.
"Younger investors should consider emerging markets funds, which invest in countries such as China, India, Russia and Brazil. These countries have rapidly expanding populations and growing economies."
He recommends the Aberdeen Emerging Markets fund, which has grown by 9.9% in the past year and has holdings in Samsung, China Mobile, and Brazilian energy company Petrobras. Its annual charge is 1.75%.
Nearer to home, Khalaf also suggests the Invesco Perpetual Income fund, run by star fund manager Neil Woodford. The fund grew by 14.8% in the past year and its annual charge is 1.5%. Khalaf also recommends the Jupiter Global Managed fund, which grew by 8.7% in the past year. Its annual charge is also 1.5%.
How to draw your pension
You've spent years saving into your pension. So how can you make sure you get the most out of it?
There are two main options when it comes to turning your pension fund into an income for retirement. One is to buy an annuity, where usually the entire pot is handed over to an insurer in return for a set income for life.
Anyone buying an annuity should shop around for the best deal; don't just accept the offer from your pension provider. You may be able to get a much higher income elsewhere.
When buying an annuity you should also declare any health or lifestyle issues such as smoking or high blood pressure. These could lead to a higher income, simply because you are not expected to live as long.
You also need to consider if you want an income that increases with inflation every year; and if you want your spouse to receive the pension after you die. Both these options will mean your starting income is smaller because the payments will have to increase later.
Buying an annuity is irreversible and can have a huge impact on the quality of your retirement. It is therefore worth getting expert advice.
Those with larger pension pots (around £150,000 or more, if you have no other sources of income) could consider income drawdown instead of an annuity. This involves taking a regular sum from your pension fund while keeping the rest of the money invested. You can still buy an annuity at a later date.
Auto-enrolment is here
All workers aged 22 or over and earning more than £8,105 a year will soon (if not already) be automatically enrolled by their employer into a workplace pension. Even better, employers have to contribute. From 2018 your employer will have to pay in at least 3% of your earnings.
You can opt out if you want, but the government is hoping the new system will provide millions of people with a pension for the first time.
Very large companies started enrolling workers last month, with smaller companies following over a period of several years. Ask your employer for more details. For more information go to moneywise.co.uk/auto-enrolment.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.