It probably comes as no surprise to learn that saving for retirement is woefully low on the list of priorities for most people in the UK.
In one sense it is understandable. The cost of living is high and getting higher, saving to buy your first home has arguably never been more difficult, and starting out on your career path after graduating from University with thousand’s of pounds of debt to your name is not ideal.
Some of today’s retirees have been lucky or foresighted enough to work for employers that offered final salary pension schemes. You work for the same employer until you retire, and they give you a pension to live off for the rest of your life. You did not really need to think about saving for retirement yourself.
I think that is part of the problem we have today. It is a relatively new phenomenon to have to make your own provision for retirement income knowing no one else will help you to any great extent, if you want a nice lifestyle when you are older and do not want to work anymore.
For me the three most important aspects of saving for retirement must be:
- a) wanting to retire;
- c) having access to your money;
- b) using tax efficient long term investments.
Wanting to Retire
Before considering how to invest for retirement you must first decide that you do actually want to retire. People spend money on the things they want to, rarely if ever on the things they need to. So if you want to retire then surely it makes sense to spend some money on getting there as quickly as you can.
Having access to your money
I think people can be put off from the fact that they cannot access money that is put into a pension before they reach 55 years of age. To someone in the 20’s or 30’s that’s a long way off and anything could happen in the meantime. That is where an ISA could prove a useful investment for retirement.
Money that you invest in an ISA can be accessed anytime.
What is more, you can earn tax free income in retirement from your ISA,
something you cannot do with your Pension.
Using tax efficient long term investments
So whilst an ISA is great while you are younger because it promises to offer access to your money anytime you need it, what it does not do is offer tax rebates on contributions going in to your pension. That you can only do with a Pension. If you invest £80 into a Pension the Government will rebate £20 to make your overall contribution up to £100 into the Pension. If you are a higher rate taxpayer you can also claim a further £20 tax relief via your tax return.
The obvious route therefore would be to use an ISA while you are younger and a basic rate taxpayer to ease your way into retirement savings, and then consider putting your ISA savings into a Pension when you are older, and perhaps a higher rate taxpayer to get maximum benefit from the tax relief available on Pension contributions.
So is an ISA or Pension best for your retirement savings? Probably both!