How to be smart when saving for retirement
The sooner you start saving for retirement, the better. Money saved in the early years has so much longer to grow in value.
If you invest, say, £1,000 at age 25 it will be worth £7,040 by 65, assuming average annual growth of 5% after charges in that time.
However, if you save exactly the same sum at age 35 it will grow to just £4,322 by age 65, significantly less, while at age 50 it will grow to just £2,079.
Early contributions are the most valuable because compound interest has so much longer to work its magic.
Read more: Saving for retirement: How much do I need
The main reason people do not save enough for a pension is that they have more pressing things to spend their money on.
You may have little left over after funding everyday living costs, or larger expenses such as saving for a car or property deposit.
Avoid using this as an excuse for inertia. Saving something is better than nothing and even if money is tight, you could start small with sums as little as £25 or £50 a month.
Read more: What type of pension is right for you?
Build up over time
Saving for a pension is a long-term business, in fact, it should take up all of your working lifetime, 40 years or more.
You should steadily increase your contributions over time, so if you get a pay rise, consider diverting the extra money into your pension rather than simply frittering it away.
Stocks and shares are more volatile in the short run but should give you a much better return over periods of 10 years or longer.
Read more: Are you getting the pension you deserve?
Choose the right scheme
If you have access to a company pension with employer-funded contributions, snap it up. By opting out you are effectively turning down free money, and will inevitably regret it later.
You can supplement this by saving in a personal pension or tax-free individual savings account (ISA) under your steam.
Read more: How to budget for retirement
Get maximum tax relief
You can claim tax relief on your pension contributions at 20%, 40% or 45%, depending on your income tax bracket. Again, this is effectively free money, in this case from the government. At retirement, you can also take 25% of any pension withdrawal free of tax.
You get slightly different tax breaks on ISA. There is no tax relief on initial contributions but you can take all your returns free of income and capital gains tax. These complementary benefits make a combination of pension and ISAs ideal, taxwise.
It is down to you
To make a success of retirement savings, you have to be disciplined. Yes, there are dozens of things you would rather spend your money on but one of people's greatest financial regrets is failing to save enough for their old age. Your smartest move is start setting aside money today.