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How to…plan for retirement

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Pension providers are fond of reminding us that we will increasingly have to look after ourselves in retirement. If pension planning is one of those things that never gets ticked off your to-do list, here are some thoughts that may spur you into action.

1. The earlier the better…

Boring, but true. The earlier you start, the longer compounding has to work its magic. £100 a month at 25, gets you a pot of £153,000 at 65 (assuming an annual growth rate of 5%), £100 a month at 45 gets you a pot of just £41,000.

2. …but every little helps

Pension providers like giving scary statistics about how much you have to save to achieve a decent retirement, but every little helps. Starting late, or with £25 a month, is better than doing nothing.

3. You will have three potential pensions in retirement

Make sure you maximise them:

  • From the government – you need 35 years of national insurance contributions to qualify for the new full state pension and 10 qualifying years to get anything at all. Check your state pension here.
  • From your employer – your employer has to contribute to a pension on your behalf. This is free money, so make the most of it.
  • From a personal pension – You can start a personal pension quickly and easily with a platform provider such as Fidelity or Hargreaves Lansdown. Minimum investment levels are low and they will provide guidance on how to invest.

4. Pensions are not the only source of income in retirement

You may have income from other investments, such as an ISA, or a buy-to-let property. Make sure you factor these in when you are calculating how much you need to save.

5. You get lots of free money by saving in a pension

The tax credit system is clunky and complicated, but it does mean that for every pound you put into a pension, the government gives you 20%, 40% or 45% on top, depending on your tax rate. That’s worth having.

6. Platforms make it easier to invest in private pensions

It really isn’t difficult to get started with a personal pension. You can sign up for a low-cost Self Invested Personal Pension (SIPP) with one of the platforms, set up a direct debit and you’re away. Most platforms have a suggested pension portfolio that you can use. Make sure it is reasonably low cost and is diversified across a range of funds.

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