An OECD report in December 2017 revealed that the UK pension was the lowest of advanced nations. While some may value the state pension to supplement other income in retirement, it seems it is less likely to make a meaningful contribution – making it more important than ever to have your own pension in good shape.
The UK's State Pension is the least generous of all the most advanced economies in the world, according to a study by the Organisation of Economic Cooperation and Development. It found that average pensioners can be expected to receive just 29% of what they earned while working – up to a maximum of around £8,300 a year, depending on contributions.
So compared to living in the United States, in Europe and in Asian nations such as China and India it is vital that UK individuals put more aside to maintain their standard of living in retirement. There are therefore several factors to consider when thinking about how to prepare wisely for your future.
Start earlier and save more than you think
The need to start early and save more than you think is a common refrain – but for good reason. Our research shows that if you invest for retirement only at age 55, through an average wealth manager, you would need to invest £425,000 in a balanced portfolio (plus £700 a month) to gain a pension pot that could give you an income of £35,000 for 24 years.
Source: Netwealth, Numis Securities
However, if you start at age 45 – and again plan to retire at 65 – you only need to invest £250,000 (plus £700 a month) through an average wealth manager to achieve the same goal of 24 years with an income of £35,000.
You should also not underestimate the impact of fees on long-term investing. While having an extended period to invest allows the benefits of compounding to come into greater effect, this timeframe also illustrates the devastating influence of the accumulation of fees.
Watch out for your limits…
Although the lifetime allowance (LTA) – the value limit of what you can withdraw from your pension without incurring extra tax charges – is set to rise by £30,000 to £1,030,000 for the 2018/19 tax year it was cut dramatically in the last few years. The maximum annual limit for pension contributions is £40,000 if you earn less than £150,000 a year. This limit reduces by £1 for every £2 earned over this figure – down to a minimum of £10,000 for those earning £210,000 or more…
These limits may pose challenges for those who expect to breach them. Some may feel that this ceiling could prevent them from saving enough for their retirement – but this is not the case, and you should consider other options to efficiently increase your retirement pot.
…but ISAs could help you invest effectively
Many more investors are viewing ISAs as a sensible and straightforward way to help them secure a larger retirement pot. The current limit of tax-free savings of £20,000 a year might not be adequate for some investors, but again, the benefits add up over time – especially when individuals may also benefit from a provider that offers cost-effective ways to invest.
Unlike pensions, investors do not receive tax relief on contributions into an ISA, but they do benefit from tax-free investing. Withdrawals are also tax free rather than being treated as income like they are with pensions.
At Netwealth we make it easy to transfer ISAs or other investments where you may be paying too much to have your money managed professionally. We manage transfers for you and the process usually takes around 10 days. When you invest with us we give you an option to transfer money automatically from your General Investment Account into your ISA at the beginning of each tax year. You can also automatically realise your capital gains before the end of each tax year to ensure you use your capital gains tax allowance if possible.
Consider the benefits of a network
We’ve established that investment fees can dramatically eat into returns, a situation that may affect multiple family members or a group.
But why shouldn’t individuals be able to benefit from the economies of scale which typically only apply to institutions? This disparity prompted us to pioneer a way for family and friends to form a network – and take advantage of even lower costs when investing their money.
Your individual investment goals are not compromised. Investors benefit from pooling resources – because the more that is invested, the lower the fees – but you also are free to pursue the investment goals that are more suitable to your needs. For example, you may want to take more or less risk than other members of your group.
In addition, younger family members – who wouldn’t ordinarily be able to meet minimum investment thresholds – can start investing earlier and thereby gain valuable years of having their capital being better protected against inflation.
This short video explains how the Netwealth Network works.
Not just one quick fix, but several thoughtful steps
The UK’s State Pension may offer only a minor retirement contribution for many investors. Therefore, more people must take on board the risks of inflation and investment performance themselves, or assign a reliable provider to do that for them.
Whatever you decide, these tools and projections could help you to plan effectively.
There is no single quick fix to creating a resilient retirement strategy. Rather, similar to the benefits of compounding, it is the accumulative results of the sensible steps we have outlined that will most likely make a meaningful difference to your future.
Please remember that when investing your capital is at risk.