Saving for a private pension is among the top financial advice you can receive. But the tip is usually said to people in their 20s and 30s. Does that mean it’s not worth opening a pension after 50? Here is a quick look at why buying a private pension could be a good idea. You can also read about the alternative options you have to generate retirement income.
Should you start saving for a pension after 50?
The short answer is ‘yes’. It’s never too late to start saving for a pension! While it is always better to start as early as possible, you’re not running out of time in your 50s.
Even if you start at 50, you still have 16 working years to save. The current state pension is 66, and there are plans for it to increase in the coming years. You have plenty of time to save a nice pension pot. No matter how much you can save, it’ll always be more than if you don’t even start.
It’s worth keeping in mind that you should have contributions to your State Pension if you have been working most of your adult life. You can read more about the State Pension from our previous guide.
Of course, the State Pension might not be enough and opting for an additional pension is a good idea.
You might be enrolled in a workplace pension scheme
The good news is that you could be enrolled into a pension scheme if you are currently working. Most companies now have to offer workplace pension schemes. Automatic enrolment to these schemes began in October 2012.
If you are an eligible employee, then you start paying into the workplace pension set up by your employer automatically. The employer will also contribute on your behalf. These employer and Government contributions make contributing to a workplace pension scheme beneficial. While it’s possible to opt-out, you should think twice about doing so.
The maximum contribution is currently 8% of your qualifying earnings and divided so that:
- You pay 4%.
- Your employer pays 3%.
- The Government tax relief adds the remaining 1%.
If you receive £30,000 in salary every year, you deduct the qualifying threshold for pensions, which is £6,240 for the 2020/21 tax year. This results in £23,760 of qualifying earnings.
Opting for a private pension
The above shows the benefit of workplace pension schemes. As these are now mandatory, you might have been saving for a pension scheme if you are working.
You can also opt for private pensions, referred to as ‘Self Invested Personal Pension’ (SIPP). The schemes are private pensions, and they work similarly to investment schemes. You make monthly payments or a one-off payment to the pension plan. These are an option if you are self-employed or if you want to opt-out of your workplace pension scheme, for example.
The money is then invested in a range of assets. How much you can get depends on how much you can invest, as well as the type of pension plan you have. The return on these investments can go down and up. Therefore, it’s a good idea to discuss the plan with an independent adviser.
Take advantage of pension tax relief
One of the significant benefits of opening a pension even after 50 is the tax relief you could enjoy. When you are paying and saving for a pension, the Government gives you back some of the tax you pay on your pension.
The relief works as follows:
- Tax relief on your pension contributions of up to 100% of your earnings or £40,000 annual allowance (whichever is lower).
- Paid at the highest rate of income tax you pay. For basic-rate taxpayer, it is 20%, for higher-rate taxpayers 40% and additional-rate taxpayers 45%.
If you put £100 of your salary to a pension, then it will cost you £80. The government would pay the £20. This adds up to a nice sum every year, meaning it can be a better alternative to traditional saving.
Is opening a pension your only option?
It is worth noting that if you do start saving for a pension in your late-50s, you have to save more than if you started in your 20s. To get a sizeable pension pot, you could be setting aside £100s per month. You might find it challenging to generate enough savings by the time you retire, especially if you are on a low-income.
Having a private pension is not the only option you have, however. You should consider other saving and investment options to guarantee a usable income for your retirement.
Other options include things like:
- Investments – stocks, property and other assets.
- Savings – favour cash-ISAs for tax-efficient forms of saving.
- Annuities – different types of annuities could help you receive income during retirement.
How to pick the best option for you?
The answer to whether it is worth opening a pension after 50 or opting for an alternative route depends on your circumstances. You should look at the different options available to you. Your circumstances will help decide which saving or investment option fits your retirement plans the best.
When it comes to planning for retirement, the important thing is to:
- Calculate what type of retirement income you need and want. Examine your current lifestyle and running expenses to get an idea of what you need.
- Identify your current savings. Make note of your state pension, other pensions you might have and any other types of savings you already have.
- Consider the amount you can set aside from now. You should consider if you can make monthly contributions or if you can make a bigger one-off investment, for example.
If you are unsure of your options, then it can be a good idea to discuss your situation with an independent advisor.
Saving for your retirement is never too late. While it’s best to start as soon as possible, there are options available even when you are approaching your retirement. Opening a pension after 50 could be a good idea. But you’ll also have other options that may suit you better. The key is to start planning to ensure a stress-free retirement!