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Saving for your Retirement
Why should you save for your retirement?
Retirement might still seem like a lifetime away for some and with the pinch of the credit crunch, starting a pension may be the last thing on your mind. But when you consider that you could be spending more than 30 years in retirement, there has never been a more important time to save into a pension, as well as keeping a close eye on how much you’re saving, you need to regularly review your investment funds and what level of income in retirement you will get.
As you begin looking into your plans for your retirement, 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.
What can you expect from the state?
The basic state pension from the government will give you a foundation for your pension planning, but can you rely on it! The current full weekly allowance for a single person is £95.25 (up until April 2010). This adds up to around £412 a month if you’re on your own.
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.
Get a pension forcast now form The Pension Service >>
Employer pensions are becoming less generous
One more thing to think about on top of the state pension is that pension schemes provided by employers are on the whole becoming less generous. While your parents and grandparents may have 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 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 you can with 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.
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.
A visit to an experienced and Gow's will help you with your pension choices and will explain what you need to do with your financial plans to enjoy a comfortable retirement.
How can you save for your retirement?
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, you will have the peace of mind that a pension fund will be there for your later years. It may make financial sense to get the best of both worlds and save in ISAs and a personal pension but an IFA can help guide you through these choices.
ISA's
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 2009/2010 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 2009/2010 tax year follow.
| Cash ISA up to £3,600 | Plus |
The remainder of up to £7,200 in a Stocks and Shares ISA |
Cash IFA up to £3,600 |
Or |
Stocks and Shares ISA up to £7,200 |
With a pension plan you can contribute up to £245,000 (20009/2010) 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.
Stakeholder Pension
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)
There is 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.
Small-Self Administered Pension Scheme (SASS)
A SSAS is an occupational pension scheme that can be used for a maximum of 11 members. One-member SSASs are popular arrangements with founding members of a business, owners and chief executives with 50% of the equity.
They are occupational schemes, but escape many of the investment restrictions of more conventional arrangements. In particular, a high degree of self-investment is permitted.
After an initial two years, plan holders can use up to 50% of their SSAS fund to invest in their own company. The fund can also make a loan to the company and purchase the business premises, leasing it back to the company on commercial terms.
How much should I save?
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?
An Gow's will be able to help pinpoint how much you should save so you can have a comfortable retirement, but without leaving you short in the meantime.
Pensions are now a lot simpler
Much has changed recently, and will be changing over the next few years, that will impact your savings plans and retirement. Here we highlight the major changes. Remember if you have any doubt over what is the best course of action for you, contact Gow's today.
Pension Simplification
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.
It’s a good idea to re-consider which pension arrangements are the most attractive to you with the help of an expert IFA.
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 2009/10 is capped at £245,000, 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 2009/2010 this amount is £1.75m, 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.
Changes to the State Pension
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 advice from a professional advicer at Gow's IFA.
Personal Accounts – the new workplace pension plan from 2012
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.