When you are young, your retirement seems a long way off. You probably work quite hard to earn enough money to enjoy your current lifestyle, and you may well not have much if any, disposable income left over. It means that investing for your retirement is probably not high on your priority list. But now is the time to act, and here is why.
If you just rely on your state and workplace pensions, you’ll find that when you reach retirement age, your income will be limited. You’ll probably be able to get by, but that is just about all. Simple pleasures like going out socialising, eating and drinking, going to the cinema and going on vacation will be beyond your reach. You may even struggle to pay your bills.
The £310 billion time bomb
You’re not alone. An awful lot of people are facing exactly the same problem. In fact, according to government statistics, there is a £310 billion pension gap. It’s why the government has just introduced workplace pensions, but they alone (on top of the state pension) are still not likely to give you the lifestyle to which you have become accustomed.
To bridge the gap and protect that lifestyle you want to maintain, you need to take out some sort of private pension or perhaps an ISA. If you do consider the ISA option, a Cash ISA may still leave you wanting. It is the Stocks and Shares ISA, or the Lifetime ISA, or a private pension that could get you where you want to be in few years time.
Why not a Cash ISA?
Any form of cash savings account will only give you limited interest. Instant access savings accounts pay around 1% or less. Even a fixed term savings account will only offer you about 2%, and when you consider the fact that inflation is presently around 2.6%, and is likely to go higher, especially with Brexit still in the negotiating stages, cash savings are rapidly losing their value in real terms.
The good things you can say about Cash ISAs are that your savings will be relatively safe; you can invest up to £20,000 per annum tax-free, and they attract compound interest. Also, any gains are tax-free too.
The plus and minus points about Lifetime ISAs
The good things about a Lifetime ISA are the tax-free allowance (£4,000 p.a.) the fact that it too attracts compound interest, and if you start one when you are 18, you can get as much as a £32,000 bonus from the government. This assumes you invest £4,000 each year until you are 50. The bonus (which is 25% of your deposits) stops when you reach the age of 50.
On the downside, you cannot make withdrawals before your 60. If you do, you will pay a significant penalty. The only exception is if you withdraw money to fund your first property purchase. This is penalty free. You can establish more about Lifetime ISAs from the Gov.UK website.
Taking out a private pension or Stocks and Shares ISA
We mentioned earlier that cash savings or investments attract poor interest rates. So why do so many people take out Cash ISAs? The answer is that (again we mentioned this earlier) cash savings are relatively safe. With any form of investment, (stocks and shares, property etc.), your money is at risk. Investments go down as well as up. But investments of this nature attract far better interest rates.
Stocks and Shares ISAs are attractive options, especially if they are low-cost and fully-managed, like the one offered by the robo advisor and wealth management company Moneyfarm, and also if you want to safeguard your lifestyle in your retirement. But the one thing that holds many people back is that risk factor; and this where private pensions score to a certain degree. If you take out a private pension with FCSC cover, your investment will be protected up to the value of £50,000.
No rights and wrongs
When it comes to guarding your lifestyle choices through retirement, there are no absolute rights or wrongs, apart from the fact that you need to start saving or investing as soon as you can. If you can afford it, the best plan is to spread your options and save money in cash savings accounts or ISAs as well as investing in a stocks and shares portfolio.