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Plan for an active retirement now

Daniel Lane

Daniel Lane - Fidelity Personal Investing

My parents arrived in Santiago de Compostela at the weekend, 33 days after setting out on what would be a 800km walk along northern Spain, from the French side of the Pyrenees to Galicia.


It’s an incredible achievement and while they now try to even out their one-sided tans (not by making the return journey I’m assured) it made me realise just how much more active they are in retirement than my grandparents. And, with continuous advances in healthcare, that I am likely to be more active still by the time I’m their age. Don’t hold me to completing the Camino though.

By ONS projections, I’m expected to live until around 90 years old - three years more than my parents, and likely to be extended even further with growing medical technologies. This is clearly a good thing but perhaps the biggest difference between these two generations is how we plan to fund an ever-lengthening third age.

For Generation X, many of whom benefit from income-guaranteeing defined benefit pensions, the responsibility of paying out as long as is necessary falls on the pension provider. For my generation, the demise of the defined benefit pension means that responsibility shifts to us.

Throw in the fact that the average London home costs 13x the average salary in 2018 (8.5x in 2008) leading to couples having children later and turning to saving later still, and that burden can seem even more daunting.

But rather than allow it to completely overwhelm us, there is a clear course of action we can take now to give us the freedom many of our parents are already enjoying or at least looking forward to.

Keep your pension ticking over

If you have a company pension, make sure you’re getting the most out of it. A lot of firms will match your own monthly contributions up to a certain level, but even above that there’s nothing stopping you putting more in now to get that compounding effect started.

You can currently get tax relief on up to £40,000 that you save into your pension each tax year. You could benefit from 20%, 40% or 45% tax relief depending on the rate of income tax you pay. This means a £1,000 contribution would actually cost you £800 if you’re a basic rate tax payer, £600 for higher-rate taxpayers or £550 for an additional-rate tax payer.

We all factor the likes of Amazon Prime, Spotify and Netflix into our monthly budgets - just treat your pension contributions the same way. At least this way you get something back later down the line.

Reinvest, reinvest, reinvest

Talking of compounding, racking up regular dividend payments and reinvesting them is investing 101 and can seriously enhance your savings over the long term.

If you had invested £100 a month in the FTSE All Share index over the past 30 years and automatically reinvested any dividends back into your investments, you would be sitting on a portfolio worth over £130,000. If you had taken those dividends out instead of reinvesting them, your pot would be worth just over £66,000 - little more than half as much1. Please remember past performance is not a reliable indicator of future returns.

If you’re thinking of kick-starting your long-term savings, don’t underestimate the value of starting now and saving regularly. When you’ve swapped the office for a trek through Pamplona you’ll thank yourself.

More on saving for retirement in your 20s and 30s

Five year performance

As at 17 June
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
FTSE All-Share 4.6 -5.8 28.1 7.0 -0.6

Past performance is not a reliable indicator of future returns

Source: Fe, as at 17.6.19, in GBP terms with income reinvested 

1Refinitiv and Morningstar, total return in GBP, May 2019. Returns from 30 April 1989 - 30 April 2019.


Important information

The value of investments can go down as well as up so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.