By ADRIAN LOWCOCK 21/07/2009
Compound interest, Albert Einstein is attributed with saying, is the most powerful force in the universe. Whether or not Einstein actually said this is uncertain, but its effects should not be ignored.
Compound interest is the concept of adding accumulated interest back to the capital sum, so that interest is earned on interest straight away. Its power comes from two primary factors; time and return. When saving for retirement how long you save and the yield (interest) you earn on your savings are as important as the amount you save.
Example
The maximum tax-free pension pot the Government will allow you is £1.8 million. If you save for 25 years and earn 5% on the savings you will need to put aside £25,000 a year to achieve that figure. However, if you saved for 45 years and were earning 10% you only need save £2,000 per annum.
ISAs
Following the 2009 Budget, ISA allowances will rise for all to £10,200 from 6th April 2010 (For those aged 50 or over by 5th April 2010 can benefit from the increase on 6th October 2009). With no limit on the size of your ISA pot a couple putting away their annual limit for 25 years with a yield of 5% could accumulate £1 million. If they could get returns of 10% this figure would rise to more than £2 million.
The combined effects of ISAs and Personal Pensions means that the vast majority of people in Britain will not need to pay tax on their retirement savings.
Charges
Having side stepped the taxman, you next need to deal with salespeople in the financial services industry. Warren Buffett, probably one of the most successful investors in history, had a fortune of $62 billion (in 2008). If he had paid normal charges of a hedge fund for investing his money more than 90% of the return would have ended up in the fund manager’s pocket. Investors can help take a large chunk of this back by not paying initial commission which can be over 5%.
To find out how much you can save take a look at our fund discounts.
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