How Can I Save for the Future?
There are many ways you can save for the future and look forward to a more comfortable retirement. Some strategies are more complex than others, but the process always starts by looking at your situation, deciding your goals and your chosen level of risk.
Put simply, the earlier you start saving the better, and the sooner you can clear any debts, the easier it will be to focus on your savings.
Perhaps you have been saving for some time, but you’re worried your money might not cover your retirement plans? Or have you recently acquired a sum of money through redundancy or inheritance? Maybe you’re looking to change your current savings strategy and make the most of your hard-earned money?
In this article, we share some useful tips to help you make more informed decisions about your savings.
Pensions vs ISAs
Pensions and ISAs are the two most common ways to save towards retirement. Both offer a long-term strategy for savers and various tax advantages. Nowadays, there are very few savings accounts provided by banks and similar entities that can offer attractive returns due to low interest rates, so, exploring your pension and ISA options is a worthwhile exercise.
First, let’s look at pensions. There are many different types of pension including the State Pension, Workplace Pension, Final Salary Pension, and a Personal (Private) Pension. We will explore the benefits of each pension type in a future article. Put simply, you can extract money from a personal pension in four different ways:
Pension drawdown – this is one of the most popular ways to access a pension pot. When you retire, your provider continues to invest your money. You can take up to 25% of your money as a tax-free lump sum.
Uncrystallised Pension Lump Sums (UFPLS) – if your future plans are likely to rely on being able to take out lump sums, then you can access your pension this way. For each withdrawal the first 25% is tax-free. Although you’ll have flexibility in how much money you can take out, your money won’t be reinvested.
Cash in – if you’re considering cashing in your pension in the future (or you would like this option), the first 25% is tax-free, however the remaining 75% would be taxed as an income. If considering this option, you will need to be aware of incurring a large level of tax, within a single tax year.
Annuity – although this option has become less popular in recent years, it’s the only one that offers you a guaranteed income. You could choose to receive your pension income for a set number of years or for the rest of your life. Again, planning will be needed to protect and manage your financial situation through retirement.
Before you choose how you intend to use a pension, it’s important to gain an accurate forecast of your projected pension income. Despite the recent increase in the State Pension, you’re unlikely to enjoy a comfortable retirement if you plan to rely on State Pension income. If you were born after 1960, then you may have to wait until you’re aged 66 – 68 before you can receive the State Pension. Any gaps in contributions will also affect your pension income. For a State Pension forecast, use this link: https://www.gov.uk/state-pension-age
The Pensions Annual Allowance is the maximum you can put into a Personal Pension plan to gain tax relief. Contributions have been frozen until 2026, so it’s more important than ever to assess the value of your current plan.
The Pensions Lifetime Allowance is a limit on pension funds an individual can have before a tax charge is put in place. If you have been saving into your pension for some time or you have a Final Salary Pension, then it’s likely you will be affected by the recent pensions freeze. Talk to one of our qualified financial advisers for an up-to-date pension forecast.
If you’re thinking of investing into an ISA, there are several types to consider:
Cash ISA – split into either Fixed Term or Instant Access. This is where interest rates will be affected by the ability to access your money. Usually, the longer you leave your savings and the less access you need, the better return on investment.
Stocks & Shares ISA – using your ISA allowance as a tax wrapper, you could enjoy potentially higher returns than a Cash ISA, but your money will be at risk. You can only pay into one Stocks & Shares ISA per year, but you could reinvest into a new one each year.
Other specialist ISAs – this includes a Junior ISA which is for children only, and the Lifetime ISA for adults aged 18 – 39 saving towards a house deposit or retirement. There’s also a new Help to Buy ISA which is specifically for first-time buyers.
3 Facts about Pensions and ISAs:
You can hold a Cash ISA and a Stocks & Shares ISA at the same time, and if you’re eligible, you could also hold a Lifetime ISA and a Help to Buy ISA too. Just remember to check that you don’t exceed the allowances, which will differ for certain ISAs.
If you currently hold an ISA, did you know they keep their tax-efficient status after you pass away? So, you can leave this to someone in your Will, but you would still have to pay inheritance tax if your total estate is over the threshold (currently £325,000, UKGov).
Did you know that pensions don’t actually form part of your estate? You can name a beneficiary to receive your pension after you pass away and you don’t need to include this in your Will.
The Aventur team offer a diversified approach to retirement savings and investments, and due to the ever-changing pressures arising from a volatile economic climate and the infinite variables of people’s personal situations, we are developing an exciting new financial technology platform. Our aim is to offer you an unparalleled level of financial advice and support. Keep an eye on our website for the latest news on this exciting development!
If you would like a review of your retirement savings strategy, then get in touch to speak to our team.