Saving for your retirement
Why should you save for your retirement?
Retirement might seem like an awfully long way off, especially if you’re still paying off your student loan, furiously saving to get a foot on the housing ladder, or have a young family which are burning a rather large hole in your pocket. But you could end up spending more than 30 years in retirement, so it’s essential to make plans to save into a pension, 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.
What can you expect from the State
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.
Employer pensions are becoming less generous
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.
If you’re in pension scheme where the onus falls on you to make the decisions about how to invest the contributions, this may sound daunting. 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 joining.
To find out where you stand in terms of making pension provision, your first step should be obtaining a state pension forecast from the Department of Work and Pensions’ Pension Service by calling 0845 3000 168, and then have a look at ‘How can you save for your retirement’ for details of different pension and savings vehicles available to help you plan for your retirement. A visit to an experienced and qualified IFA will help you with your pension choices and will explain what you need to do with your financial plans to have 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 finds 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.
ISAs
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
- Or Stocks and Shares ISA up to £7,200
Personal Pensions
With a pension plan you can contribute up to 100% of your salary into it (to a maximum of £235,000 for 2007/2008) 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.
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 Independent Financial Adviser 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.