SMarT saving can do wonders for your pension pot
None of the clients I meet like the thought of running out of money during their lifetime, yet for those not thinking ahead and looking to the long-term, this is a real possibility.
Generally, people are now living longer - which is great - but on the flip side, it means more money is required to enjoy these additional years at a time when risk-free pension schemes are becoming a rarity for employees.
It is true the pension pot many end up with will depend on some uncontrollable factors such as investment returns and inflation, but there are some factors that are controllable, such as contribution levels.
Many millions of us are being offered entry to workplace pensions and, while they are a great start, they need to be fully funded to erase the risk of running out of money in retirement.
Latest research from the Independent Review of Retirement Income (IRRI) suggests a contribution of 15% of salary is more realistic and, while that may be great to know, many will not necessarily at first regard that as affordable, and could end up doing nothing about it!
However, there is some good news. Firstly, the Government and your employer will contribute toward this cost, making it more affordable. Secondly, you can adopt a strategy in some schemes using a Save More Tomorrow (SMarT) program. This is where you start your contribution levels off at the entry level, and have the scheme increase it automatically each year by a few percent until you reach your desired goal of 15%.
The annual increases hardly dent take home pay where bonuses are received or employers have awarded pay increases, and even in the absence of these you are spreading the cost, making it more affordable but still achieving your long-term goal.
This all centres on behavioural economics, and the idea that people who escalate build bigger pensions through increased contributions and long-term compounding rates of return. So the younger you are when you start, the better you will be when you eventually do retire.
This approach is often forgotten about, yet the compounding effects of the money inside a tax-advantaged pension over 20 or 30 years are massive.
So by all means start small, but start SMarT to enjoy retirement bliss!
If you are looking to enhance your pension in a way that best suits your situation, an IFA can help you understand your options. To speak to a financial expert in your area, click below.