NEVER TO EARLY to save for retirement

IF you’re planning to save for retirement, the golden rule is: don’t delay. The earlier you start, the better your chance of a secure future, with enough money t o provide t he standard of living that you want in your retirement.

Workers can no longer rely on generous payouts from final- salary pensions or even the state pension to fund their retirement.

Whatever your income, putting money aside is the smart move.

Here we guide you through planning for your retirement, how to invest and why saving earlier can help you in the long term:

WHY SAVE IN A PENSION?

SavIng in a pension comes with unique tax breaks. you get a tax top-up when you contribute to your retirement pot, at the rate of 20 pc, 40 pc or 45 pc. So, every £800 paid in by a basic-rate taxpayer, for example, will automatically turn into £1,000. Higher-rate taxpayers can claim back an additional £200 through a self-assessment form, boosting their return even higher.

This means your money can grow free of tax for decades.

There is tax to pay eventually, when you come to take out y our pension f und. although you are allowed to take 25 pc of your savings as a lump sum — tax free — when you retire. Plus, if you pay in as a higher-rate taxpayer and withdraw as a basic-rate taxpayer, you gain 20 pc.

The new pension rules introduced in april, which mean that people can access their pensions however and whenever they want from age 55, have also made pensions far more appealing.

you can open a personal pension plan run by an insurance firm. or you can run things yourself by taking out a self-invested personal pension (Sipp) with a fund supermarket such as Hargreaves Lansdown, Fidelity or Interactive Investor. There’s a whole host to choose from and it’s worth shopping around to find the one that suits you. Don’t be put off by the fact that saving in a pension means locking your money away until the age of 55 — the trade-off is the generous tax breaks you will receive. you might prefer to save in a place where your money isn’t kept under lock and key — in an Isa. Filling up your annual allowance is a must to make sure you maximise the tax-free opportunities. In the current tax year you can save £15,240.

IT PAYS TO START SAVING YOUNG

noT everyone can afford to save as much as they’d like (or need) each year, but putting a little something away every month is better than doing nothing.

you might be asked to work out how much income you actually need or will need to set yourself a goal. This is difficult if you’re young but it’s important to set some kind of target to work towards.

The earlier you save, the more time your money will have to grow. Saving just £100 a month from the age of 25 would result in a pension pot of £152,602 at the age of 65, according to calculations by Square Mile, the i nvestment research group.

Delaying retirement saving until age 30 would see the fund value at 65 drop to £113,609 — and leaving it until age 40 would mean a further reduced fund value of £59,551. These figures are based on growth of 5 pc.

GET A BALANCED MIX OF FUNDS

Many people are nervous about investing, because share prices can rise and fall.

Instead they take the view that it is better to keep money ‘safe’ on deposit. But in reality, even cash is not without risk.

In this case it is almost certain your money will fall in value over time as it is slowly eroded by rises in the cost of living. Historically speaking, stock market gains far outweigh cash.

By investing in funds, either in a pension or an Isa, money is pooled with that of other savers, which is less risky than investing directly in individual stocks.

Cash placed in a fund is invested by a fund manager who can choose companies that they believe will produce the income you need.

When it comes to picking the right investment, you must decide what you want to achieve in your retirement, what access you need to your money and, crucially, what risk you can take.

Those investing for the longest periods can afford to take more risk because rises and falls in the stock market resulting in losses in the short term shouldn’t matter as there will be plenty of time for markets — and your fund — to recover.

Having a balanced mix of different types of funds is important however. The idea is that if one investment has a bad time, you will always have others that will ideally not be suffering, so they act as a counter-balance.

DIVIDENDS CAN BOOST YOUR POT

THere are several different styles of funds available.

growth funds back firms that reinvest their dividends in their business rather than paying out profits to shareholders. They are popular among long-term savers who do not need to take an income from their investments.

growth f und managers will typically choose to i nvest in

companies that they believe will be able to significantly grow their earnings over time. These funds feature in most balanced portfolios because, after all the vast majority of savers are looking for investments that will generate an income, protect their capital and have potential for capital growth.

Income funds — known as equity income funds — target companies that offer a strong and sustainable dividend and could suit a lot of i nvestors, even i f the i ncome isn’t required.

This is because income can be reinvested and the accumulation of the dividends should add significant value over time.

In fact, this reinvested income is the biggest overall contributor to profits over time because of compound interest. This is the term for earning interest on interest.

It actually means you can save less for longer and be potentially better off than saving a lot in a short time.

With even a seemingly small contribution each month, the cash can soon mount up and, over the long-term, can grow to a decentsized fund.

For example, a £10,000 investment in the Artemis Income fund ten years ago would have grown to £22,849 by reinvesting dividends, but to only £14,955 if dividends were taken as income, according to calculations by Square Mile.

Another type of fund mirrors the performance of a selected market index, such as the FTSE-100.

These are known as ‘ tracker’ funds and can be cheaper to run than active funds because there is no research, nor fund manager expertise to pay for — the investment process is automated.

While they aim to mimic the returns of a market or index rather than actively pick winners, they can miss out on opportunities in some markets that have a particularly good run.

Alternatively, a ‘ multi-manager’ fund will, in effect, take care of choosing different funds for you, as long as you are willing to pay a little more in fund charges for the privilege of using it.

WHY YOU SHOULD SAVE REGULARLY

REgulAR saving is a solid investment strategy because you can cash i n regardless of how the market is performing. Saving a monthly amount smooths out the highs and lows in share prices. When they go up, the value of your stocks rise, and when they go down your next contribution buys more.

By contrast, if you put in your savings in one lump sum, should the market suddenly fall your whole pot will be affected.

Tom Stevenson, the investment director at Fidelity, says: ‘Regular saving helps avoid piling in at the top of the market and bailing out at the bottom.’

Plus, buying stocks at a lower price means you get a higher return when the market swings back up.

AN EXPERT TO HELP YOU PLAN

You might prefer to enlist the help of a professional adviser who can give you a wider assessment of your financial needs and goals, and help to match you up with the right funds.

You can find an independent adviser i n your area on t he websites unbiased. c o. uk or vouchedfor.co.uk.

A financial consultant will review your investments in, say, an annual meeting. But those who have taken the DIY route will need to do a review themselves.

Many existing investors will have accumulated a collection of fund holdings over the years that might no l onger suit their needs or changing risk appetite.

Having an incorrectly balanced portfolio could result in losses in the case of a market shock in an area in which an investor might be overexposed.

Hannah Edwards, at BRI Wealth Management, says: ‘It’s important to review your i nvestments to ensure they are doing well. View it as a journey during which you need to keep checking you’re on the right track.’

The sooner that you spot any potential shortfalls, the better your chances of being able to rectify them.