Are you in your 50s, or on the brink of turning 50? Have you started investing? Here we look at why future you will thank you for making the decision to invest, today.
You’re in your 50s, or your fast approaching your 50th milestone, and life is pretty good. Retirement is finally on the horizon, the children can take care of themselves a little more and you’re getting ever closer to finally kissing that mortgage goodbye.¹Known as the mortgage repayment pay rise, you could be up to £322 better off each month when you do own your house outright – that’s nearly £4,000 a year.
After years of sacrifice whilst raising a family, what would you do with this extra money? Most Brits splash the cash, forking out on holidays, home improvements, a new car and gifts for the children, research from Saga Investment Services shows. Just one in four would put this towards their pension.
What about if you were given a one-off £1,000? We partnered with YouGov to investigate Brits’ investing habits, and found that 24% of the over 55s would spend it on a holiday, whilst 44% would save it for a rainy day.
It used to make sense keeping your money in cash ten years ago, with interest rates over 5%¹ and inflation at 2.32%², but today the landscape is very different.
With the base rate at 0.25% the best returns you can get on a cash ISA are around 1%, but inflation is running ahead of the Bank of England’s target, at 2.9%. This means inflation is eating into the purchasing power of your money.
With retirement in sight, that’s the last thing you want. As your outgoings are falling, your 50s provides the perfect opportunity to refocus your goals and maximise your investments, by making your money work harder for you to find inflation-beating returns.
But 30% of over 55s don’t have any financial investments, because they don’t think they have enough disposable income. But you don’t need millions, or even thousands, that mortgage repayment pay rise could come in very handy.
It’s never too late to start saving for your pension
It can be confusing knowing exactly how much you’ll need for retirement, but the good news is that many overestimate the amount³. If you want to enjoy a comfortable retirement with two holidays a year, you’ll need £26,000, whilst you’ll need £39,000 if you want to live the life of luxury.
We explain how much you need to save to achieve that here.
It’s important you keep on top of your pension savings throughout your career, and regularly reassess whether you’re on track to achieve the retirement you want. You might have saved into a few pensions throughout your working life; you might want them in one place to make it easier to manage.
Around two thirds of those nearing retirement have never increased their pension contributions, research from insurer Friends Life shows, which leaves many feeling like they haven’t saved enough for retirement.
When you’ve got a grasp of where you are, you might be bang on target, but you might also find out you haven’t put as much away for retirement as you had hoped.
If you need to increase your contributions you’re going to have to make some more sacrifices for the time being. You might just be able to do that by giving up your daily latte, or you might forfeit a holiday, or reset the expectations of financial support from your children.
By starting a bit later, you’ll have missed out on the big benefits of compounding, but you’ll still be able to get a slice of the action as you’ve got over a decade for your returns to be reinvested and generate their own returns. Although it’s often underestimated, Albert Einstein called compound interest one of the most powerful forces in the universe.
Once you’ve done the hard work in building up your savings pot, make sure you’re not missing out on the generous tax benefits available.
If you’re making your money work harder for you on the market, maximise your returns even further by investing in a stocks and shares ISA. You currently have an ISA allowance of £20,000 each year, and all your returns are protected in a tax-free wrapper.
When it comes to saving in your pension, the tax benefits are even greater. You’re able to claim relief relative to how much tax you pay. For example, if you pay the basic rate of tax you’ll only have to put in £8,000 for a £10,000 contribution, whereas a higher rate taxpayer will put in just £6,000.
When you get to the age of 55, you’re also able to withdraw 25% of your pension pot tax free. This is another great tax incentive for investing in a pension. New pension freedoms also provides more control over how you use your pension from there.
In just 18 months since pension freedoms launched, savers had cashed in over £7.6 billion4. Whilst this flexibility is clearly popular, this cash is at risk of losing value over time. Instead of letting inflation diminish the pension you worked so hard to build up, look to the market as a way to help maximise your savings.
The important thing to remember is that it’s never too late to start saving for a pension. Once you’ve paid off your mortgage, it’s time to look after the future you.
1 Bank of England
3 How much will you need to retire, Which?
4 Gov.uk, Pension freedoms used over a million times to access £7.6 billion