Basics - How much will I need? - Example - Personal Pension Plans & SIPP's - Occupational Schemes - Are Pensions the only way to save - What about ISA's instead? - And then . . . - Let us help
Will you have enough to live comfortably?
What's happened to the value of your retirement savings over the past few years?
What about the State?
Well, it's not great! For those who've paid enough National Insurance contributions to earn a 'full' pension a single person gets £2,972 a year, a couple £4,953. This is taxable. For those with no other income, the Pension Credit scheme will take the single up to £6,760 the couple to £10,320. This site is not devoted to State Benefits (!) so if you want to know more go to the Governments own website (link here)
Basics
People are living longer and healthier lives; if you're reasonably healthy at age 65, average life expectancy for a man is now about 84 whilst for a woman it's 89. Anyone who relies on the State to keep them when they retire will have a very poor lifestyle indeed; the Government simply cannot afford to bring pensions up to a comfortable level. This means that it's even more important to think about how and when to save for retirement (and of course - how long to continue working). Making your own provision is the only way to make sure that you have enough money to really enjoy the years after retirement.
Where you put your savings and what return (if any) you get as time goes by depends very much on your attitude to investment. Those who are most cautious will want their money 'safe' and may be prepared to accept the sort of low level returns given by straightforward 'fixed interest' accounts whether in Banks, Building Societies, Gilts or Bonds. Those with a higher tolerance for risk, and those with plenty of years ahead before retirement will look for higher potential earnings from their investments. Our risk & reward (link) calculator will give you some idea of where your attitude lies and what it might mean for the sort of investment portfolio you will want to create (for retirement or otherwise). The different types of savings and investment plans we advice on will all allow you to make choices tailoring the level of risk and reward to your own judgement.
How much will I need?
Many Clients are surprised to find that it's much less expensive to live when they retire; for most of us going to work costs money! Customer surveys carried out a few years ago by one of the leading pension providers showed that people were 'satisfied' and had enough money to enjoy life when they had between 1/3rd and a 1/2 of their pre-retirement income.
So we don't believe that it's necessary to try and build a retirement income equal to your 'at work' income. But even just building a money 'pot' sufficiently large that you can draw this level of income for the rest of your life might still be a tall order, especially if regular saving doesn't start until later in working life. This example looks complicated, but it takes in a lot of ground:
Example
Take a man or woman age 35, expecting to retire at age 60, earning £30,000 a year and looking to get a retirement income of half that so £15,000. First make a guess about the inflation rate over the next 25 years say an average of 2%. Using our Effect of Inflation (link) calculator you can see that the need is then just over £24,600 a year.
Now think about the sort of reasonable 'safe' return you might be able to get on the money in your retirement fund. Using a carefully constructed portfolio (see Investment (link) page) let's assume that you achieved 6%. So what size of fund do you need to have built by age 60 to give you a £24,600 a year income for the rest of your life? Simple arithmetic gives the answer - £24,600 divided by 6% = £410,000.
If by careful planning, again using a well thought out investment spread, you were able to achieve a 6% return on your regular savings between now and retirement age, how much needs to be put away every month to reach the target sum. Our Target Savings Calculator (link) tells you that you need to save £592 a month.
If you decide to save this money through a Pension policy, and you are a standard (basic) rate tax payer you will automatically be credited with a 20% tax credit. This brings your required monthly savings down to (round numbers) £475 a month.
If you are a higher rate tax payer, paying into a pension makes huge sense. Unless you are earning more than £100,000 a year (there are now special rules for those earning between £100k and £150k, and for those earning more than £150k) you can reclaim all the tax paid that relates to the contribution. To pay £475 you will have had to earn £791.67 and pay 40% tax (£316.67). You've already been credited with £117 so, through your annual tax return you would reclaim the missing £199.67.
You can use the same steps to work out your own need. Set against that the provision you've already made. Is the answer ok or is there a shortfall?
Personal Pension Plans (PP's) & Self Invested (SIPP's)
Pensions are long-term investments with special tax rules. Over the past few years legislation has been brought in to simplify the nature of PPP's and SIPP's). There is no longer a restriction on how much you can contribute each year based on earnings; a number of plans from the past have disappeared and until the last Budget (when tax relief rules became more difficult for high earners), we've been left with a fairly straightforward landscape:
- There's a maximum lifetime limit to the size of pension fund you can create presently £1,500,000 - and this, for most people, is a long way ahead of their present provision.
- Below this limit you'll get a tax credit of 25% added to each contribution - £300 a month from you becomes £375 into your PP.
- If you pay higher rate tax you'll be able to reclaim a further £125 through your tax return. If you add that back into your pension your original £300 has just jumped to £500.
- At retirement (somewhere between age 50 and 75) you can take up to 25% of your total fund as a tax-free cash lump sum.
- The remaining fund can be put into 'income drawdown' (if it is invested in a SIPP) or must be used to buy a lifetime Annuity.
- Any money remaining in a SIPP by age 75 will most likely need to be used to buy a lifetime Annuity.
Occupational Schemes
The days of 'Rolls-Royce' Final Salary Schemes would seem to be pretty well at an end. The costs of maintaining the benefits in the face of the Government's strict accounting rules has turned a valuable employee benefit into an economic millstone; Schemes are closing fast. New schemes are Money Purchase meaning that the pension you'll get depends on the size of the fund you've been able to build exactly like a Personal Pension.
Every employer with 5 or more employees is obliged by law to offer a pension scheme. At the moment however (& there is talk of changing this) they are not obliged to contribute to it. Without an employer contribution, or the provision within the scheme of other benefits life or health insurance there is little obvious advantage to an employee.
But our advice would always be to check out an employers scheme before making private provision. If the company is prepared to make a worthwhile contribution this becomes a huge benefit.
Are Pensions plans the only way to save?
No, and pension plans have their own disadvantages when you come to turn them into retirement income later in life. It's the lifetime Annuity that can be the problem because, simply put, if there was no such restriction, you could probably get a much higher rate of return for your money than you will get from an annuity.
As we are all living longer, returns from annuities are dropping. Furthermore, they are paid for by insurance companies who (for safety & security) rely on getting their returns from Gilts. In the present low interest rate climate this safety and security is being bought at a high price a low rate of return
Tax credit and relief on contributions remains a powerful incentive to use Pensions as the principle vehicle for retirement saving. But if the idea of the restrictions on your use of the accumulated fund rankles, what else could you do . . . . ?
What about ISA's instead?
'Instead' is probably the wrong concept 'as well as' might be better. Most people need some security in the income they draw in retirement, so having at least a part of this income taken as a guaranteed lifetime annuity, that the tax man has substantially helped to fund, isn't a bad idea at all.
But Individual Savings Accounts (ISA's) are another way of saving money; there is no income or capital gains tax to pay on them, and there are no restrictions on how you can use the money you accumulate. You are allowed to invest up to £7,200 each year in a maxi (stocks & shares) ISA, and £3,600 into a mini (cash) ISA. From October 6th this year, if you're over 50 these limits go up to £10,200 (maxi) and £5,100 (mini).
So if you invested the under 50's maximum each year, with a portfolio that returned (say) a net 6%, and you did that for 20 years, you would generate about £227,225 (try your own figures on our Regular Savings (link) Calculator). Without any tax to pay along the way, and if re-invested tax efficiently to give money every month at the same 6% net rate this would work out at £13,600+ a year.
The drawback, if there is one, could be in the charging structure. A modern Personal Pension Plan usually costs between 1%-2.5%. An ISA is likely to be 3%-4%, so making a net return of 6% consistently over the years will be more difficult.
And then there are
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Regular savings Endowment Plans. Endowments have had a bad press over the past few years, but the poor returns have been more about the 'With Profits' funds that they were traditionally invested in, along with some steep 'up front' policy charges. The few products remaining in the market offer the same broad investment choice as a Pension Plan or an ISA, with more modest charging. For people who want to retain control of their retirement planning (and many of the self-employed, together with a fair number of the employed, fall into this camp), and who want to be able to pass any unneeded retirement capital to their heirs, these plans can be a useful weapon in the armoury.
So . . . Let us help you with your Retirement Planning
Decisions you take now about deferring some income or capital now, for use later when you retire, are probably amongst the most important you will make. Our job is to help you to get:
- From where you are
- To where you want to be
There are a lot of different ways to make that journey. The skill is in choosing the ones that are right for you right now!
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