Money journalist Laura Shannon: My four rules for saving into a pension
You could be forgiven for thinking pension saving is tomorrow’s problem.
And when you’re reminded of the need to save long-term, you might also be wondering if proper grown-ups have stood back long enough to notice that house prices are through the roof, while your salary is stuck in the basement.
The answer is always simply to start – whether big or small. Then embrace my four golden rules for saving into a pension, which are to: automate, inflate, spectate and aggregate. Let me explain further.
The quicker you assimilate pension saving into everyday life the sooner you can stop using the (mostly untrue) mantra “I just can’t afford to save into a pension right now”. Many of us will have said it, guiltily knowing that we also can’t really afford to do a lot of other things we somehow find the money for.
If you can afford holidays, coffees, clothes and eating out, chances are you can afford a pension.
That’s not to say you have to over-worry about how much you put away.
Most probably you can afford a small amount – and a small sum is all that matters at first. About a decade ago I started with £50 a month. At the time it was a significant enough sum for me to commit to – and you can start with even less. But once it is routinely and automatically absent from your pay-packet you will forget you ever had it.
Whether it is a workplace, personal, stakeholder or self-invested pension, open it up and shovel some money into it. If you decide to set up your own pension, arrange for contributions to leave your account on the same day your salary goes in, so you never miss the amount.
Gradually increase your pension savings each year. If your pay rises, make sure your pension contributions do too. And if you get a promotion or new job that translates into a minor leap in salary, increase the percentage of salary you tuck into the pension. For example, if you were contributing 3 per cent, up it to 5 per cent. Hopefully your employer will match your contributions, which along with Government tax-relief added on top will further inflate your savings.
You can also add one-off contributions if you get a work bonus, gift or inheritance.
Check up on your pension. Make sure you are happy with how it is invested (even if it’s in the default ‘whatever the experts reckon’ fund). And keep an eye on how your retirement finances might look like years down the track. But don’t obsess over the daily swings of the stock market or how your pension is performing over a short term.
There will be bull-runs, crashes, soaring share prices and slumps-a-plenty over the course of your working life. Don’t dwell on them.
Be a casual spectator when saving for the long-term, rather than a player (unless you’re actually a fund manager or trader – in which case play on). You don’t need to run the field, just watch and keep perspective. This is also a great rule for people who really can’t be bothered to do any more than that anyway – you’re off the hook!
A pension doesn’t have to be the only savings pot to get you through retirement. Isas can also play a big – and useful – role. It is this fourth step where I need to up my own game.
Money for a pension goes in tax-free but is taxable on withdrawal. Isas are the opposite – contributions are made from net salary but money can be withdrawn free of tax. It makes sense to try both.
With a pension the money is tied up until later life, but with an Isa the money can be spent sooner if you need it.
I have room in my monthly budget to open a stocks and shares Isa, but haven’t yet moved beyond a cautious pot of cash. That is of course losing me money in real terms thanks to inflation.
You should seek advice if you are unsure if an investment is right for you. The opinions included in this article should not be construed as advice or recommendation.