Planning for your retirement is a complicated affair. With the wealth of financial instruments on offer, it can be tough to know where to start. Pension funds are a good option for some people, but not always for all. Plus, some like to have a pension fund and an additional form of savings. That could be in the guise of assets like gold or property, or it could be in the form of a savings account.
Given the volume of savings accounts available, it can be overwhelming knowing where to start, even in this small segment of the financial product market. Here, we look at what accounts are suitable for retirement savings and how to find the best options for you.
Accounts suitable for retirement savings
The following are savings accounts or financial products that you can use to help fund your retirement. However, just because you can use them to help you fund your retirement does not immediately make them suitable for you. Any investment you make or account you open must happen with your circumstances in mind. Be sure that you know what your tolerance to risk is and what your regular outgoings are. You should also do so with your aspired standard of living in mind. By keeping these factors at the forefront of your decision making, you will make a better choice based on your specific situation.
Cash ISAs can be used for retirement planning purposes in some cases. In fact, in some situations, the benefits will make them an attractive prospect. For starters, there is no upper age limit on cash ISAs, so they are open to you at any age. It means if you're already drawing a pension, you can pay into a cash ISA if you have some form of income already. They are also seen as low risk, and your spouse can inherit a cash ISA even if they have one in their name already.
Most importantly, any interest you receive on your cash ISA is tax-free. It means that, depending on your tax bracket, you may save a lot in tax that you would have to pay on interest earned from other savings accounts.
There are several disadvantages to cash ISAs, though, most notably their historically low interest rates. Plus, the amount you can pay into the account is capped, and you cannot carry over your annual allowance. Finally, you will receive no tax relief on contributions.
Stocks and shares ISAs have many of the benefits of cash ISAs. That means there is no upper age limit, and you can pay in a lump sum. However, as stocks and shares ISA invest in the stock market, the upside potential is unlimited. And that upside is not subject to capital gains tax until profits are realised.
The disadvantages of such a savings account are almost the same as a cash ISA. However, whereas a cash ISA only receives a small amount of interest, it is relatively safe. Stocks and Shares ISAs are far riskier. Losing money on the stock market is easily done if you make the wrong investment.
Easy Access Savings
Easy access savings accounts are often a popular choice of savings account for individuals who are unsure when they will need to access their funds. The clue is in the name - they are easy to access. While they may not benefit from the same tax efficiency as ISAs, they do come with some benefits. Firstly, they provide a known amount of interest, thus helping with budgeting for the future. Secondly, they are suitable regardless of how much you have to save - small lump sum or large.
However, with that ease of access comes one significant disadvantage. That known amount of interest is often tiny. In many cases, you will be lucky if it beats inflation. The result is you lose purchasing power with your savings if inflation surges.
For those with an income that they want to drip feed into a savings account - either in retirement or in the run-up to it - a regular savings account can be an option. Regular savings accounts often offer better rates of interest than easy access accounts and encourage regular saving.
However, the drawbacks to these accounts can put some off. Firstly, you only ever earn that higher interest rate on what you have saved in the account. As a result, it can sometimes be financially better to put a large lump sum into a savings account with a lower interest rate. The lump sun earns the interest on a more significant amount from the beginning. As such, compounding interest can make a big difference. This is made worse at times as there are monthly deposit limits. You may want to save more but cannot. Alternatively, if you do not save anything one month, you will not earn any interest at all.
While strictly not a savings account, fixed-rate bonds can provide some savings-like benefits to a potential retiree. By buying a bond, you will receive a regular income stream from the bond issuer to recompense you for parting with your cash. At the end of the bond's life (maturity), you receive back your original investment amount.
Fixed-rate bonds can be a good option for those planning retirement, as they can be a relatively low-risk investment while providing an income stream. They also protect capital amounts. However, all those benefits, as ever, come with disadvantages. Bonds mean you are locking your money away for a set period. If you choose to redeem your bond before maturity, you will be heavily penalised. The result is you will not receive back your original investment amount.
How to find the best options for saving cash as you get older
Now that you know some of the possibilities available to you when saving cash for retirement, how do you find the best options? You must make an informed decision when choosing what savings accounts you do open. If you do not, you are likely to make one that does not suit your circumstances optimally. The result could be that you have less money in your retirement than you want or need. Consider the following when researching the market for the best options for saving your cash.
Know your risk profile
Your risk profile is your attitude to risk and your ability to take on risk. For instance, if you have a large pension pot and a healthy, steady income, your tolerance to risk is higher than someone with a small pension pot. However, despite this, you may not still be willing to take on risk. Alternatively, you may have a small pension pot and small income but be willing to take a chance on riskier savings account types.
Think about your quality of life
In addition to knowing your risk profile, it is worth thinking about your quality of life when looking at savings accounts. Do you want the same quality of life you have now? Or do you want it to be better? Knowing the answers to that will help you realise what sort of returns you need to see from your savings account to help you achieve it. It could be that you have to take on riskier investments should you want a quality of life in your retirement. Yet, that lifestyle may be far more expensive than your current pension pot can afford.
Speak to a financial advisor
Speaking to a financial advisor is one of the best ways to find a suitable savings account option. They will not only know the market, but they will know what options will tie in well with your circumstances. They may cost money for their time, but the hope is that you more than recoup that expenditure. Their knowledge should allow you to save your money in the most efficient way possible so that you are always making your money work for you. They will also take on board what you want in terms of your quality of life in your retirement.
What to do if you are just starting retirement saving and planning
One of the best things you can do when starting retirement saving and planning is to know what all your assets currently are. You also need to look at your outgoings and what they may be in the near and distant future. Do you have children to put through school, for example? Will you buy a more expensive house? Or downsize, resulting in lower mortgage payments?
Then, you also need to think about what type of lifestyle you want in the future. Much like a person further down the line in pension planning, you still need to choose your desired quality of life. If you cannot live without many of life's luxuries, you may need to take on more risk if your income is not large enough to make smaller, less risky investments.
It is also an excellent time to talk to a financial advisor. They can show you what a difference you can make just by saving that little bit more each month to your final pension pot. With compounding over several years, it can result in a considerable amount.
Finding a retirement savings account
Finding a retirement savings account can be an excellent way to complement any other pension plans you already have in place. However, it still needs to be done with caution and care. Relating all savings accounts to your own needs and requirements means you will be able to make the right decisions for you.