As if you don’t already have enough on your plate; writing work proposals, finishing the latest piece of work for that one demanding client, updating your website, getting some head shots done and trying to hide the fact you’re screaming on the inside.
Now you’re meant to think about how you’ll pay for food and wine and life in another 20, 30, 40 years time? Next month, that’s when you’ll look into it. Promise. Well, the downside to investing for your future is the longer you wait, the harder it gets.
Pensions and saving and investing don’t have to be scary though. They can be as complicated as you want them to be, but for most people the rule of ‘Keep It Simple’ is the best way to go.
1. Know what a Pension is
A pension plan is simply the name of a savings account that you can put money into. But unlike most other savings accounts, you will get tax relief on any contributions you pay into it. Depending on what tax bracket you are in, the Government will top up your pension with the amount of tax you’ve already paid.
To add £100 per month to your pension pot you need to;Basic rate taxpayer, if you pay in £80, the Government will pay in £20.Higher rate taxpayer, if you pay in £60, the Government will pay in £40.Top rate taxpayer, if you pay in £55, the Government will pay in £45.
While there is no limit to how much you can put into a pension, there is a limit to how much the Government will give you tax relief on.
2. Open a Pension account (Self Invested Pension Plan – SIPP)
Just Google online pension platform and you’ll find a handful to choose from. A good financial advisor will be able to guide you on this, but if you want to do it yourself the main factors to look at are the fee’s you’ll pay and the funds available to invest in.
While the difference may only be fractions of a % per year, because you’re investing over decades this can add up to £000’s.
The fund selection you have is important because that limits where you can invest your money and what likely returns you’ll make over the next few decades.
The actual process of opening a SIPP is straightforward. It’s just like opening a bank account, so go through the platforms step by step process and you’ll be fine.
3. Fund the Pension
Next up is putting some money into the pension. You can invest a lump sum up front if you want, but just remember those annual limits for tax relief.
The best thing to do is decide how much to allocate each month to your pension. The stuffy old man’s guide to this is take your age when you start investing and divide it by 2. That’s the % of your salary you should then invest each month.
In reality, just invest what you can comfortably afford. You want to set up the standing order so it goes out the same day you’re paid so you never miss it. If you get a pay rise in the future, before you get used to the extra money, think about putting a decent chunk of that pay rise towards your pension fund.
You can always take a break and stop paying into the pension if you really have to, but you should try to avoid that as best you can. The longer you can invest the better.
4. Pay into a Fund
This is where a good financial advisor will become worth their weight in gold (not literally, gold is really expensive!). It very much depends on your circumstances and your goals and your timeframes, blah blah blah.
What I would say is just saving it and leaving it in cash or similar ‘savings accounts’ getting less than 1% per year interest is not going to help you out in the long run.
Most work pension schemes invest in the stock markets around the world, which historically have given a return of 7%+. In fact the Government tells financial advisors that they are allowed to use 3%, 5% and 7% in their forecasts to clients. So you should be aiming for the higher of those figures in your fund!
You can keep things simple by buying into a fund that does the hard work for you. Fund managers like Vanguard offer funds that split your money across some high-risk investments and some low risk investments. There are literally thousands of funds to choose from, but don’t let that intimidate you or put you off.
But remember, Keep It Simple to start off with. Speak to someone who can either advise you where to invest the money or teach you what you need to know to make up your own mind.
Just keep funding the pension and investing it in funds until the day you retire.
You’ll probably want to change where you invest the pension fund over the years, and the closer you get to retirement, you want to reduce the risk of major losses in your investments.
The next stage from here is to work out how much you need when you retire, and how much money you need your pension pot to be worth to get it.
Pensions are scary because of the time frames involved and the apparent complexity of them, but when you think of it as just another account that you’re going to put some money in for your future – and the Government will throw in a bonus too, it becomes much less daunting.
As a former financial advisor myself, I helped show clients where to invest their money. Now I spend my time simplifying the process and teaching people how to invest for themselves, so they know what they are doing and why.
It’s much simpler than you’ve ever been lead to believe!