Hello I'm Clare and welcome back to Smart Investor the series that helps you get to grips with investing. Retirement may feel as though it's ages away not something you need to worry about at the moment but if you don't start thinking about it could be even further away than you hoped because put bluntly you might not be able to afford to stop working. We recently carried out some research which found that three in five pensioners said they weren't enjoying the retirement they hoped for because they haven't saved enough. So what do you need to do to ensure you're not in the same boat and where do you start? Please be aware we can't offer personal advice so if you don't feel confident about making pension or investment decisions on your own do seek independent financial advice. And bear in mind that tax rules do change and their affect depends on your individual circumstances, which can also change.
So pensions, under the government's auto-enrolment scheme, most people who work for an employer will automatically be enrolled into their company's pension scheme. You can opt out of it if you want to but if you stay enrolled both you and your employer will make contributions into the scheme boosting the amount you save. If you're self-employed or don't have access to a company scheme you can pay into a personal pension. The sooner you start saving the longer your money will have to grow So how much should you be putting away? Well some suggest halving your age at the time you start your pension and then putting this percentage of your income away each year.
So for example, if you start your pension when you're 30 you may want to aim to put away 15% of your pre-tax income each year. These however are just rough calculations based on long-term assumptions. There are limits to take note of though. Most people can pay up to £40,000 a year into their pension but there are exceptions so you should check your personal entitlement. The best thing about pensions is the tax relief they offer. You'll get tax relief at the basic rate of 20% on anything you pay into a personal or workplace pension. So for every eighty pounds you contribute to your pension the government will top it up to a hundred. If you're a higher or an additional rate taxpayer you can claim back up to an additional 20% or 25% through your self-assessment tax return.
Remember though, you can't currently access your pension savings until you reach the age of 55 and this is rising to 57 by 2028. Of course pensions aren't the only way to save for a time and some people choose to save into ISAs so have they have the flexibility to access their savings sooner than 55 if they want to. This year you can pay up to £20,000 into an ISA and this can be split between a cash investment or an innovative finance ISA. All gains and returns are tax-free with both ISAs and pensions but once you've taken the tax-free cash from your pension the rest will be subject to income tax as you draw an income or lump sum.
All withdrawals from ISAs are tax-free, albeit although you'll probably pay money on the income tax before you invested it into your ISA. If you're under the age of 40 there's also the new Lifetime ISA launched to encourage younger people to save for their first home or for their retirement. You can save up to £4000 a year for your first home or for their retirement. You can save up to £4000 a year from your ISA allowance into a Lifetime ISA which will then be supplemented by a government bonus up to 25%, up a maximum of a £1000 a year and you can save up until the age of 50. Bear in mind though that if you withdraw money from a Lifetime ISA for a reason other than buying your first home or for retirement you won't get the government bonus and you'll have to pay a charge so you're likely to get back less than you paid in.
We have lots more information about pensions and savings for retirement on our website which should help improve your knowledge and understanding. Thanks for watching, and see you again next time.