Do you want to ensure you have a comfortable retirement but don’t have thousands of pounds to put away each month?
As an expat, you will generally be enjoying a larger net income than you would back home. This maybe down to paying little or no tax, or just an increased salary.
However, we also know that living the expat lifestyle can be more expensive and additional luxuries can mean that your increased income can quickly be gobbled up by brunches, maids, holidays and school fees.
Your retirement can seem a long way off, however if you’re 45 now and want to retire in ten years’ time, the reality is you only have 120 monthly paydays left.
In this article we’ll try to show you 3 simple steps to boost your pension fund, so you can enjoy a comfortable retirement, without compromising your current living standards too much.
1. Reduce the fees or charges being taken from your pension
Fees and charges can have a huge effect on your pension and often you will not know exactly how much is being taken from your pension. This is generally because you we never told what the total fees and charges on your pension were, as its not normally in the interest of the personal selling it to you.
You may think 1.5% annual charge is reasonable, however, over many years, this can have a devastating effect on your pension. Let’s look at an example in the table below, based on a starting pension pot of £50,000.
Pension A has an annual charge of 1.5%
Pension B has an annual charge of 0.8%
If both pensions held the same investment, after 25 years, Pension A would be £34,280 worse off purely because of the higher charges.
If you’re an expat and have transferred your pension to a SIPP or QROPS through a financial adviser, it’s highly likely that you will be paying much higher than average fees from your pension. Take a look at our Fees Comparison.
From April 2015, the UK Government implemented a charges cap of 0.75% for default funds of workplace pensions. It covers all of the employee’s charges and deductions, excluding transaction costs. Just because you’re now overseas, doesn’t mean you should be paying over the odds in pension fees.
2. Make sure your investments are working for you
We know investments can can seem complicated. You’ve probably heard the terms funds, shares, the stock market, bonds, inflation, foreign exchange etc. Well the thing is, you don’t really have to know what these are and how they work, as there are investment experts to do that for you. You just need to make sure that you pick the right experts to manage your investments.
Try to choose a portfolio that invests your money across many assets classes, such as shares, bonds and property. You also want to diversify across different industries across the World. The old adage is usually true, “don’t keep all your eggs in one basket”.
Think about your attitude to risk, how hands-on you want to be with your pension, and how long you have until you want to access your pension. Those three factors will help you to choose the right portfolio for you.
For most people, a low-maintenance portfolio that takes care of itself, managed by a team of experts with minimal fees, is the ideal solution.
Everyone should remember that if you’re presented with an investment, which offers a guaranteed annual return of 20% with no risk, then consider another old adage, “if it sounds too good to be true, then it probably is.”
3. Contribute regularly from your income
In the UK, all employees are now enrolled into a workplace pension scheme with minimum levels of contributions for employees and employer. This is to encourage people to save for their retirement so that they are not reliant on the state in retirement. There may be similar arrangements overseas, such as End of Service Benefit/Gratuity in the Middle East, or Mandatory Provident Funds in the Far East.
Many expats however think of these as small bonuses when they leave the country, and don’t really use them for retirement purposes. You could pay this money into your UK pension fund, however, I’m sure this has already been earmarked for another purpose, even to keep as a sensible emergency fund.
Therefore, you should really be thinking about saving a small amount of money each month into your pension fund. How much you save is up to you and your desired lifestyle in retirement. Here is a common rule of thumb for choosing a figure to save to build up a pension fund for a comfortable retirement.
Start with the age that you started saving into a pension, then divide it by two. This should be the percentage of your income that you save each month. For example, someone who started saving into their pension aged 40 should be putting away 20% of their salary each month, whereas someone who started saving into a pension aged 24, only needs to put away 12% each month.
If you want to calculate how much you might need in your pension to provide a comfortable retirement, use our retirement fund calculator.
These amounts may seem like a lot, so the earlier you start saving the better, and you will also benefit from compound interest.
Compound interest is essentially the practice of earning interest on interest, or growth on growth. For example, if you invest £100 and this grows by 10% after one year, it will be worth £110 – growth of £10. If this remains invested and grows by another 10% the following year, it will be worth £121 – growth of £21. After ten years of 10% annual growth, the original £100 would be worth £259.37. Now think about the effect of this on a monthly basis and investing over decades, the growth will soon outweigh the original investment many times over.
Indeed, it is believed that Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
So here is a summary of the 3 simple ways to boost your pension fund:
- Reduce the fees and charges on your pension
- Review your investments
- Make regular contributions
Hopefully you now have an idea of how much you need in your pension for a comfortable retirement, a figure in mind to save each month to reach this, and the motivation to review your pension fees and investments to make sure you’re getting the best deal.