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Retirement might still seem like a lifetime away and combined with
the pinch of the credit crunch, starting a pension may be the
last thing on your mind. But as you could end up spending more
than 30 years in retirement, it is more important than ever to
make plans to save into a pension, and keep a close eye on how
much you’re saving, what investments you are choosing and what
level of income in retirement you will get.
Before looking at providing for yourself you should check what
your entitlement is for the State Pension and what you may get
from any employer schemes you belong to now or have belonged to
in the past.
The basic state pension from the government will give you a start,
but you can’t rely on it! The current full weekly allowance for
a single person is £90.70 and £145.05 for a couple (up until
April 2009). This adds up to around £393 a month if you’re on
your own. Think about how much you’re earning now. The state
pension isn’t much is it?
However, not everyone actually qualifies for a full state pension.
It depends on how much National Insurance (NI) you’ve paid during
your working life. A woman with a working life of 44 years will
need 39 qualifying years of making NI contributions for a full
state pension, and a man with a working life of 49 years will need
44 qualifying years.
The good news is that from 2010 the number of years of NI contributions
that need to be paid to gain a full state pension will be cut to
just 30, for both men and women.
The government has also taken note of how much longer people are
living nowadays and will be increasing the state pension age so
people will have to work longer before they get their state pension.
One more thing to think about on top of the lowly state pension
is that pension schemes provided by employers are on the whole
becoming less generous. While your parents and grandparents probably
benefitted from a final salary pension scheme (also known as
a defined benefit scheme) at the companies where they worked,
changes in regulation, volatility in investment markets and longevity
increases have made it difficult and expensive for employers
to continue offering them.
The pension income paid by a final salary scheme is calculated
as being a percentage of your salary multiplied by your years of
qualifying service. But these pension schemes are now few and far
between and the final salary schemes that do exist are rapidly
closing to new members.
The type of employers pension scheme that is replacing final salary
schemes is called a defined contribution pension scheme (also known
as a money purchase scheme).
A defined contribution pension scheme places the responsibility
on you, and if applicable, your employer, to pay contributions
into the scheme. You can’t rely on the guarantee of knowing what
the value of your pension benefits will be as provided by a final
salary scheme. You have to choose the funds or assets your pension
fund is investing in and you need to ensure that you are paying
enough into the scheme to be fairly sure that a sufficient pension
will be paid to you when you retire.
Ask your employer what pension schemes they offer. If you can
join a final salary scheme you may be best served doing so. If
you are able to join your employer’s defined contribution pension
scheme you need to decide where contributions into the scheme are
invested and find out if your employer will pay money into your
pension.
It can be daunting if you’re in a pension scheme where the onus
falls on you to make the decisions about how to invest the contributions, therefore
you should talk to an independent financial adviser to help guide
you through your choices.
Remember, turning down employer’s contributions which would be
paid into an employer’s occupational pension scheme is akin to
turning down a pay rise, so think carefully before you make a rash
decision and decide there’s no point in joining.
So if you want to save for yourself, instead of relying on the
State or your employers, what can you do? There are two main
ways you can save, in an Individual Savings Account (ISA) and
a pension plan, both of which have advantages. With the former
you can take the money out for say a deposit on a home, and with
the latter, as you cannot access the funds when you want, your
will have the peace of mind that a pension fund will be there
for your golden years. It makes financial sense to get the best
of both worlds and save in ISAs and a personal pension.
Individual Savings Accounts (ISAs) are a great way to save. They
are available to individuals who are UK resident for tax purposes.
The minimum contribution levels are low and ISAs are available
to those aged 16 and over for a Cash ISA or aged 18 or over for
a Stocks and Shares ISA. You can contribute up to £7,200 a year
into an ISA and gain gross interest. You can also withdraw money
from the majority of ISAs whenever you want.
There are two types of Individual Savings Accounts, a cash ISA
or a stocks and shares ISA. You can invest up to £7,200 in stocks
and shares in the 2008/2009 tax year in an ISA. Up £3,600 of this
amount can be saved in cash with one provider. The remainder of
the £7,200 can be invested in stocks and shares with the same provider.
The investment limits for the 2008/2009 tax year follow.
| Cash ISA up to £3,600 |
Plus |
The remainder of up to £7,200 in a Stocks
and Shares ISA |
| Cash ISA up to £3,600 |
Or |
Stocks and Shares ISA up to £7,200 |
With a pension plan you can contribute up to 100% of your salary
into it (to a maximum of £235,000 for 2008/2009) and receive
tax relief.
The tax relief is generous as for every 80p a basic taxpayer contributes
to a pension, the government will add 20p. For a higher rate taxpayer,
they will receive 40% tax relief, meaning they will pay just 60p
for it to be topped up to £1 by the government.
It may be that you have to make your own pension provision. If
so, you should consider saving in a personal pension plan. You
can also save into a personal pension plan if you are a member
of an employer’s pension scheme.
A straightforward personal pension plan is a “stakeholder” personal
pension plan which is a type of low-charge pension in which you
can save from as little as £20.
Or you could choose a personal pension which often offers a wider
investment choice than what’s available with a “stakeholder” personal
pension. But do be aware that personal pension plans often have
higher minimum contributions and the charges could be higher too.
Self-invested personal pensions (Sipps) are another type of personal
pension plan which are for more sophisticated pension investors
as there are very few restrictions on what you can invest in. But
do be aware that SIPPs can have high fees because of the width
of the investment choices. There are well over 50 Sipp providers
so speak to an Independent Financial Adviser to see if a “stakeholder”
personal pension plan, a personal pension plan or a self invested
personal pension plan is right for you.
The earlier you start to save, the more potential your pension
savings have to grow. It’s far better to pay a realistic percentage
of your earnings into a pension as soon as you start earning,
than to suddenly panic when you get to the age of 50 and realise
that you will have to pay in hundreds of pounds every month if
you want to get a half-decent pension.
Of course you need to be careful to strike the right balance in
how much you save. Think carefully about how much income you might
need before you retire – have you factored in children’s university
fees, what you would do if you were suddenly made redundant?
Much has changed recently, and will be changing over the next few
years, that will impact your savings plans and retirement.
From 6th April 2006, so-called “A-Day” or pensions simplification,
life got simpler for retirement savers as the government brought
in a new simplified set of rules, effectively shelving the eight
previous tax frameworks for pensions.
One change is that all pension policyholders will be able to take
25% of the value of the fund as a tax-free lump sum, when they
come to take benefits. This levels the playing field between different
pensions.
Another new rule is that you and your employer will be able to
pay up to one annual allowance into your pension. This amount is
up to 100% of your earnings and for the tax year 2008/09 is capped
at £235,000, with the limit set at £3,600 for low or non-earners
paying into personal and stakeholder pensions.
A further move designed to encourage us to save more is the greater
ease with which people can save into a number of different pensions
at the same time under the new rules.
As well as the annual allowance, there is also a limit on your
entire pension savings, including any private pensions, occupational
pensions and free-standing additional voluntary contributions.
In the tax year 2008/2009 this amount is £1.65m, with the threshold
expected to rise over the years to allow for the impact of inflation.
Introducing one lifetime limit for pension fund size effectively
bins the sometimes complicated calculations savers could be forced
to work through. If you exceed £1.65m, you will be hit by the new
lifetime allowance charge, or recovery tax, which will be charged
at up to 55%.
A pension fund of more than £1.65m might sound like the preserve
of the very rich, but it is likely that more individuals than they
realise will be in danger of breaching the lifetime limit.
If you have already breached the £1.65m threshold or are concerned
about doing so, you are strongly recommended to seek professional
advice.
The state pension system is also experiencing a considerable shake-up.
The Pensions Act 2007, which became law on 25 July 2007, made
changes which will, generally speaking, affect people who reach
state pension age on or after 6 April 2010.
At the moment, the basic state pension is paid to women at age
60 and men at 65.
But from 6 April 2020, the state pension age for both men and
women will be 65. In 2024, it will rise to 66, in 2034 it will
be 67 and then in 2044 it will reach 68.
However if you were born before 6 April 1950, the changes won’t
affect you.
These rises are in response to the fact that people are living
much longer, and it is becoming a burden for the government to
support pensioners from the age of 65.
While working longer may seem like bad news, the good news is
that the number of years’ national insurance contributions people
will need to achieve a full basic state pension will reduce to
30, for both men and women, from 2010. This is a significant reduction
from the current requirement of 44 years for men and 39 years for
women.
Another change is a plan to re-link the state pension with earnings,
rather than inflation, in 2012.
Because earnings accelerate faster than inflation does each year,
the state pension will become more generous.
The fourth big change for state pensions is the move of the state
second pension to a simple flat rate. If you think this may affect
you, seek professional advice from an experienced IFA.
Alongside these changes to the State Pension the government has
proposed even more changes on top of these.
In the same year that the capital is hosting the Olympics, a new
model of pension saving is planned, called personal accounts.
All employees aged 22 and over and earning more than £5,000 per
year, who aren’t offered access to an employer pension arrangement,
will be auto-enrolled into personal accounts in 2012.
You do have the chance to opt out, should you wish. But if you
don’t let your employer know that you have opted out, you will
automatically join the scheme and pay 4% of your salary into it.
Your employer will contribute 3% of your earnings, and an extra
1% from tax relief will be added in making a total of 8%.
So, if your employer doesn’t offer a pension scheme at present,
they will have to offer personal accounts and it may be a good
idea to stay opted in as you will receive employer contributions,
a bit like a delayed pay rise.
However, as some means-testing issues have yet to be ironed out
with regards to personal accounts, it may be worth seeking financial
advice about whether you should opt out or not.
The Pensions world remains complex and baffling for many of us.
Choosing the right pension provider, the most appropriate funds
and agreeing an affordable level of contributions can be difficult
to decide by yourself.
So contact us so that we can analyse your needs and advise on the
most suitable products for your situation.
Bear in mind that there are over 35,000 financial products in the
marketplace and we can assess your financial situation then suggest
the most suitable solutions.
We will: -
- Explain your investment options
- Take you through the different types of pensions on offer
- Assess your attitude to risk Suggest the type of fund(s) that
will suit you
- Look at your earnings, outgoings and priorities
- Indicate how much you should be putting away each month.
All the advice provided will be set against the background of your
complete financial situation.
Levels, bases of and reliefs from taxation may be subject to change.
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