Ways to save for retirement when your budget is tight
6 min | 11 May 2023
Soaring prices and short-term financial goals can make it easy to put off saving for retirement, especially if you’re on a tight budget. The good news is that it’s possible to build a moderate nest egg even if you have a limited income, as long as you start saving early.
While most experts agree you should start saving for your pension as soon as possible, the reality is often different. Saving for retirement can easily be pushed aside when you’ve got credit card bills or a student loan to pay. The cost-of-living crisis is also putting the squeeze on people of all ages, making it even more difficult to save for retirement.
If you’re paying into a pension fund, it might be tempting to reduce or even cancel contributions to beat the crunch, but this could cause severe damage to your retirement plans in the long run if you’re not careful.
Sadly, a report from 2021 found that two-thirds of retirees already risk not having a large enough pension pot to sustain their retirement and could run out of money when they’re older. That’s why making regular contributions throughout your working life is incredibly important.
Why you shouldn’t cut your pension contributions
If you’re looking to bring home a bit more from your paycheck, you might be thinking about pausing your pension contributions. But keeping up with your payments means you’re less likely to struggle to make ends meet when you retire. The money you pay in could be worth more later on than if you spent it now, so by stopping your contributions (even for a short period) you could face a shortfall when you retire.
Many employers match your voluntary contributions up to a certain limit, so you would not only be waiving your own contributions but potentially missing out on the value of any contributions your employer would match. And these contributions are pre-tax, which means you're not paying tax on this amount.
The time factor gives your fund time to grow. For example, if you’re 30 and start putting £200 into a pension each month, your pot may be worth £156,990 if you retire at 68. This is working on the assumption of a 5% investment growth each year after costs and that you don't take out a 25% tax-free lump sum at 55.
However, if you opt out of your pension scheme and delay starting until three years later, the fund would only be worth around £141,557, working with the same assumptions above. In other words, putting off paying into a pension for three years, in this scenario you may lose around £15,000 from your retirement pot. Remember that value of your investments can go down as well as up, and you may get back less than you invest. And forecasts are not a reliable indicator of future performance.
What can you do?
Even though saving for retirement can be challenging at the moment, there are things you can do to help make it easier, even if money is tight.
- By creating a budget you can get a handle on where money is coming from and where it’s going
- Figure out exactly how much your income is and what you’re spending it on – such as loan and mortgage repayments, utility bills and insurance
- If your income is less than your outgoings, look at ways to try to minimise those outgoing payments. Being on a tight budget means every spending decision adds up, but by making a few small changes, they could give you some room to save
Cutting unnecessary spending can help you gain control of your finances. Start by trimming things that won’t be too painful before working your way up to more significant cuts across the board. Go through credit card and bank statements and make sure you can identify every item. You may find your trial memberships have become regular monthly payments you could cut, for example.
Consolidate your pensions
If you’ve built up two or more pension pots, you might be thinking about combining them, so you have everything in one place. Doing this could have a positive effect on your eventual retirement income as it means you’ll generally pay one set of management fees, rather than multiple ones for different pots (which could erode a pension’s value over time). However, depending on your pension provider and the type of pensions you have this might not be the best outcome, so you should speak to an independent financial adviser.
Plan now for your future
The key to having a sizeable retirement fund is to begin planning as early as possible, so start putting money away as soon as you can realistically afford to. Everyone has to start somewhere, and setting yourself goals and milestones will help make it more achievable.
There are plenty of good reasons to save and only you can decide where your priorities lie. But if you concentrate on your pension now, you'll be helping your future self in the long term.
As with all investing, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. A pension may not be right for everyone, and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice. Forecasts are not a reliable indicator of future performance.
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