Saving for retirement: everything you need to know

You could see it as your reward for years of hard work or your chance to do those things you’ve never had time for, but however you view it, retirement is something you earn, and it should be something you can look forward to. It’s important that you’re financially secure when you decide to stop working, but it’s also important to make sure that you have enough to enjoy a good quality of life, too. On this page, you’ll learn the importance of maximising your retirement savings, how to grow your savings pot and when it’s best to start saving for retirement.

Many people in the UK aren’t saving enough to live on once they retire. If you’re one of those people, you may have to consider retiring later, start saving more now or adjust your expectations of what you may be able to afford in retirement.

The current State Pension provides British citizens with a financial buffer, which, depending on your circumstances, might not be enough to live on in retirement. The full State Pension increased by 8.5% in April 2024, taking it up to £221.20 a week.

Saving for your retirement can help ease financial strain in later life, especially when you decide to stop working or reduce your hours. We get used to a certain standard of living, and it can be difficult to adjust to anything less than that later on. After all, if you’ve worked hard, you should be able to enjoy your retirement without having to compromise too much.

If you start to save early, that means there’s more time for your savings to grow. Plus, you’ll have more time to recover from unexpected financial events and your savings are more likely to get a boost.

The best time to start saving for your retirement depends on your circumstances, but it’s best to start saving as early as possible to make the most of the time you have to save. It might seem too early, but if you’re in your twenties, now might be the perfect time to start, even if you can’t afford to save much.

Simply learning about how to save, including understanding pensions and savings accounts, can start you on the path to saving for retirement.

It’s easy to overlook the importance of saving for retirement when we are younger. Of course, if you start saving from a younger age, you’ll be better set up later in life, but even if you start late, that’s better than never starting at all.

If you are over the age of 50, you may need to do a little extra to help yourself. Contributing larger sums of money to your pension each month can boost your pot by the time you reach retirement age, currently 66 for both men and women. You can also work beyond that age if you want a larger sum to leave your working life with.

There’s an old saying that goes, “the best time to start saving for retirement is yesterday”. It really is never too early to start. If you are truly no-nonsense about kickstarting your retirement savings plan, you should pay into a personal or workplace pension. Even if you start paying just 5% of your monthly salary into your pension pot at the age of 18, you’ll reap the benefits.

Another effective approach to early retirement saving is to open an ISA. This would provide a safe place for your money while offering the flexibility for access should you need to dip into the pot before retirement age – and it’s tax-free. You might also want to consider opening a savings account for retirement, which offers a competitive rate of interest.

When it comes to your retirement fund, your first step might be to consider: how much do I need to retire comfortably? This depends on when you get started saving for your retirement and your goals for later life. There’s a big difference between affording daily living costs in later life, and being able to spend on travel, home improvements, leisure trips, and the security of a nest egg.

A general rule of thumb is to set aside around 15% of your annual pre-tax income. This level could work best if you’re actively saving between the ages of 27-66. If you start saving for retirement later in life, you may have to readjust these figures and save a little more to match that standard.

Now you’ve calculated how much income you’ll need, the next step is to work out how to save for retirement. Some of the best ways to save for your retirement in the UK include:

Saving into a pension is the most popular way to save for retirement in the UK. You can contribute to a pension as soon as you start earning, but you won’t be able to access the money until you’re 55. Pension plans also offer tax relief, as you can claim some tax back on the money you put into your pension while you earn interest on your contributions.

UK employers auto-enrol eligible employees into pension schemes and make contributions on their behalf, so unless you’ve opted out, it’s likely that you already have a pension. One benefit of having a pension plan is that you’ll pay less tax, as a portion of your salary is paid into your pension pot before the tax that you need to pay on your income is calculated. This means that in addition to growing your pension, you pay less tax to the government on your salary. If you save through a pension scheme, your regular contributions can be invested, so your pension should grow throughout your career and provide you with an income above the State Pension once you retire.

You might consider opening an ISA as a solution for retirement savings. ISAs allow tax-free growth with flexible access to funds, providing versatility in managing your financial future. Whether opting for a Cash ISA or Stocks and Shares ISA, you can tailor your investment approach as desired. Integrating an ISA into your retirement savings plan can offer added flexibility alongside traditional pension plans.

Another option is investing for retirement by building a diverse investment portfolio. You can spread your investments across assets, like stocks and bonds, to minimise risks and boost potential returns. This strategy complements traditional savings methods like pensions and ISAs, and helps you meet your long-term savings goals for retirement.

If you have a lump sum to save, a fixed rate bond might also be worth considering. Fixed rate bonds are savings accounts that offer fixed, competitive interest rates over terms, typically ranging from six months to five years. You’ll earn the same interest rate from the day you open the account until the end of your fixed rate term, so you’ll know exactly how much you’ll make. At the end of your term, you can withdraw your money and place it into another fixed rate bond, or you could add it to your pension plan.

Notice accounts might also be worth considering if you want to start saving for retirement but can’t commit to locking away your money for the long term. Notice accounts allow you to save money and earn interest while having the flexibility of withdrawing your money after a set period, typically between 30 and 90 days.

If you want to maximise your retirement savings, you might want to keep in mind the following:

1. Start early

Whether you apply for a pension or open a savings account (or both), the most important part of saving for retirement is starting as early as possible. The earlier you put your money away in a pension plan or savings account, the more time your investments have to grow.

2. Clear your debts

It may not be easy to pay your debts off early, but doing so means you will free up more funds and avoid paying high interest rates.

3. Prioritise your investments

We all save for different reasons, whether it’s a mortgage, car, or a wedding. The key is deciding what you need to prioritise. If you concentrate on your pension or saving for retirement with a savings account, you may earn more in the long term.

4. Set goals

If you set firm savings goals, it may be easier for you to stay motivated and actively contribute to your retirement savings plan. It can help to regularly reassess and adjust these goals to make sure they align with your financial circumstances.

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