The big question, is how much do you need to live a comfortable retirement? Everyone's dream is different. What you value will be different to everyone around you. But money and how you save it is the overriding factor to a more financially secure future.
Taking the first step is easier with support. As experienced retirement planning advisers, our guidance is designed to find your right way forward. We can:
· help you work back from your retirement aspirations, calculating how much you realistically need save;
· select products that are flexible enough to adapt to your changing circumstances between now and retirement;
· find the perfect blend for your needs today, and your plans tomorrow.
The trend of people needing to save for their own future is unlikely to slow. If you think now's the right time to start planning for tomorrow, today, contact us now.
If you have lost track of your old and paid-up/preserved pension we can help track them down and find out information on them for you free of charge.
Think before saving
Mounting pressures on people to build a nest egg for retirement can sometimes force people down the wrong path. It's important you develop a total savings strategy that will reduce the risk of losing money you set aside, but equally will maximise growth. As always, it's about balance.
Parking some of your money in a pension scheme can deliver great tax breaks. As well as being tax efficient for new growth and income, you will get an extra 20% boost courtesy of our Government. Higher rate taxpayers can claim further tax relief through their tax return.
Pensions work like an investment wrapper, so are similar to an ISA. The difference is in the limits and benefits. Like any investment, you will choose which funds to invest your pension pot in. Higher returns and higher risks are likely to go hand-in-hand. However, these are long-term plans, so your pension performance should smooth out fluctuations in investments.
The downside of investing purely through a pension fund is it can restrict how and when you can access your money. Talking to a specialist retirement adviser can help you balance a pension with other more accessible investments and cash savings.
What are the limits?
You can now invest up to 100% of your earnings, or £3,600 whichever is higher.
However, two main limits apply:
- Annual Limit
If you pay in more than £40,000 (2014 / 2015 tax year) then you will have to pay tax on any payments over that amount. There is, however, a possibility of using some previous allowances to makes higher contributions in some cases.
- Lifetime Limit
If your total fund value, including every pension you hold, is worth more than £2.5 Million (2014 / 2015 tax year) when you retire, then you will have to pay tax at a punishing 55% on any value above this lifetime limit.
Any money your employer pays into your pension will count toward these limits.
Do you need more help?
As retirement planning specialists, we can help you assess whether your pension contributions or fund/funds will be affected by these new limits.
If you're raring to go now, the next step is to look at the different types of pension:
· Individual Pension Plans
· Company Pensions
Individual Pension Plans
An individual or personal pension plan, as the name implies, is a plan that you arrange yourself, not via an employer. A good individual pension plan will give you more options, often including:
- the choice to retire when you want to, without penalties;
- the flexibility to phase out work gradually, rather than sudden retirement;
- the opportunity to reduce or suspend your contributions.
If you are your own boss or move jobs quite frequently, arranging your own pension plan is often the most flexible option.
What are the costs involved?
Unlike company pension schemes, which often pick up the tab for administering and setting up the pension scheme, you will have to cover these costs. The level of charges, choice of funds, and additional benefits will differ between different product providers. Most new pension plans have charges and terms similar to Stakeholder.
The amount you pay for this type of policy usually correlates with the investments you choose. Typically, the cheaper option is select providers that invest in their own funds. If the provider offers you access to other providers' funds, the charges rise slightly. Choosing specific investments, like individual company shares, will generally be the most costly.
When you retire your pension pot, accumulated over the years, is used to purchase an annuity, which will pay you a regular income.
You may have heard about stakeholder schemes, introduced by the Government in 2001. This low-cost scheme aimed to make pensions more accessible to people that can only set aside small amounts regularly.
The rules are the same as for Individual Pension Plans but the products must meet specified rules:
- minimum payment required must be no greater than £20;
- the charges must add up to no more than 1.5% of the fund value each year;
- the provider cannot charge for stopping or re-starting your payments or for transferring your fund to another provider.
In reality, most individual pension plans will meet these rules whether they advertise the plan as a stakeholder or not. However, only true stakeholder plans are prevented from changing the terms and future charges.
What else should I know about individual pensions?
The tax relief is the biggest benefit of pension schemes. Every £1,000 contribution will in real terms only cost you £800, as the tax man chips in the rest. Higher rate tax payers can claim back an additional 20 per-cent, giving you a £1,000 for your £600 contribution.
Another advantage is you can take out a stakeholder pension plan, even if you don't earn an income, something that individual pension plans won't allow. Grandparents and parents can even open a stakeholder pension for children, investing a maximum of £2,880 in each tax year, which is topped up to £3,600 by the Government through basic tax relief.
Specialist pension plans
There are other, more specialised, types of individual pension policies available. The key is to understand clearly the charges and risks involved in each plan. As with any form of investment, seeking advice to source the most suitable option for your needs is wise.
If the opportunity to join a company pension scheme presents itself, it's usually more cost efficient to grab it. Many occupational schemes will top up contributions, as part of the benefits package, and the employer typically picks up some, or all, of the charges.
If your company employs five or more staff, they are legally required to arrange access to a pension plan for employees. In the simplest form, that could be selecting a Group personal pension, or stakeholder scheme, giving employees the opportunity to start contributing. Alternatively, they may set up occupational schemes, of which there are two types – final salary (less common today) and money purchase schemes.
The number of employees often influences the scheme chosen by companies. If your company offers you a pension, it will likely be one of three types:
Group Personal Pension / Stakeholder
A group personal pension, or group Stakeholder pension is as it sounds - a group of individual pension policies administered together.
It works exactly as if you'd selected your own personal pension plan. You own it, and if you move jobs, you can take it with you. But, they can be better value. Because your employer may be bringing bulk business to the provider, they can often negotiate a better deal than if you approached the provider directly.
Your employer will take your chosen contributions directly out of your wages and pay it straight into the policy. If your employer chooses to make a contribution, even better. Years on, these top-ups will increase the value of your overall pension pot, making you more financially comfortable.
Defined Contribution / Money Purchase Occupational Scheme
On a practical level these work like individual pension plans. You contribute a percentage of your salary and this, combined with any employer contribution, is used to provide an income when you retire.
The difference is you do not own a pension policy yourself. Your money, with other employees is put into a large pension fund pot and your portion is earmarked for when you retire. A fund manager will be in charge of investing it. What you get out at the end will depend upon the performance of the investments selected. If you leave your employer, you will stop paying into the scheme. Over a lifetime of working, you may have several company pension schemes, which mature at retirement age.
With company schemes, you can still select the type of funds you want your portion invested in, although these are likely to be more limited than a savings investment. Overall, the charges may be lower, because your employer will often contribute towards the administration costs.
Defined Benefit / Final Salary Occupational Scheme
With Defined Benefit, or Final Salary schemes as their commonly known, the amount you receive when you retire is based upon the years of service and your final salary when you leave the company or retire. The calculation is normally one-sixteenth of your final salary, multiplied by the number of years you were in the scheme for.
The security element for employees is that you aren't depending on stock market conditions. The company is responsible for selecting fund investments. If the fund falls short of the amount needed to pay you your retirement income, it is up to the employer to make up the shortfall.
Poor stock market performance over the past five to ten years has highlighted to employers how much they might have to pay in these circumstances, so many have transferred over to Money Purchase occupational pensions.
There are other, more specialised, types of company pension policy available. Seek financial advice to find out the most suitable option for you.
Save or switch
When you leave any occupational scheme, you usually have the choice of leaving your money in the scheme, or transferring it over into another occupational or personal pension plan. If you leave within two years of starting a scheme, you can have all your contributions, minus tax relief, returned to you as a lump sum. Before deciding, you can request an estimate of the transfer value that will be available. It's vital to seek advice from a specialist before making any decision.
Suddenly, the retirement years are around the corner. You've thought things through, filled up the pension fund over the last thirty to forty years and your plans are swiftly all but a reality. Soon you'll be living off your pension. But what exactly does this mean?
When retirement time arrives, choosing what to do with your saved money requires careful thought. For many, the decision is easy – replace your work income with a pension income. It pays to choose carefully, ensuring you enjoy every penny you've invested and saved.
Easy does it
Whether you've got £1.5 million banked or £45,000, this is likely to be the biggest cash lump sum you've seen. But remember this. People are living longer and longer. Life expectancy is rising year on year. You might need this pot of money to stretch for another 30 years, or more. The big decisions are not over yet. You'll need to consider:
Pension Commencement Lump Sum (tax free cash)
Let's make this easier - a Pension Commencement Lump Sum (PCLS) is a complex way of saying “tax free cash”. When you reach your retirement age, currently 55, you can take up to 25% of your pension fund as a lump sum. This is tax free.
What can you use it for?
Spend it, clear the mortgage, save it or invest it. This cash injection can be a great boost to your retirement lifestyle. The only ‘off-limits' investment is you cannot put it into another pension plan.
Things to watch for
Taking a lump sum will significantly reduce the value of your pension fund. Make sure you seek some independent specialist advice to see how this will affect your future income.
Annuities Open Market Option (shopping around)
Whatever you ultimately decide to do, know what your options are. Contact us for more information.
Alternative Retirement Options
Although a basic annuity, in one form or other, will be suitable for most people, there are alternative options available for those with larger funds and a willingness to take higher risks. The main two options include Investment-Linked Annuities and an Unsecured Pension.
With normal annuities, your money will be invested in Gilts. These investments pay out a fixed level of interest and, because the government issues them, they are regarded as a very low risk investment.
Investment-linked annuities, also known as ‘With-Profits' annuities, could pay you more if your investment fund performs well and exceeds the annual bonus rate on the policy. By investing in higher risk products, such as the stock market funds, your income may not be consistent. Your annuity could pay less if the fund under performs.
If security is important to you and you're depending on your pension as your sole source of income, you may find this just too big a risk to take.
Compared to conventional annuities, in theory you could potentially generate better returns with an unsecured pension. But they're unsecured for a reason – your investment could be susceptible to drops in the market. This option is for sophisticated investors who are comfortable taking risks and who could afford to lose some money.
With an unsecured pension, your income is not set for life. It remains, at least partly, invested and exposed to the stock market. There are three main types of unsecured pension:
This is an unsecured pension. It enables you to take a proportion of your fund and purchase an annuity, which gives you an income for up to five years. Meanwhile, the rest of your fund remains invested and exposed to the stock market.
The plus points
Once you have purchased your annuity, for the duration of the annuity's term, you will know what your income will be. Perfect for people who like some degree of certainty.
The many plus points of short-term annuities are also their drawback. Signing up to a set income for the duration of the annuity, will reduce the overall value of your fund. If investments in your fund under-perform, it could result in a lower income when you finally purchase an annuity.
It is also worth noting that you get much less value for money with a short-term annuity. With lifetime annuities, the people who die sooner than expected subsidise the rates for everyone else. So you get more for your money. With an annuity of five years or fewer, the subsidies are very low, consequently lowering the rates. So, you get much less for your money.
If you're unsure whether short-term annuities are right for you, contact us for advice.
Income withdrawal, also known as income drawdown or pension drawdown is an option that allows you to take a taxable income directly from the pension fund, without buying an annuity.
The plus points
This would suit people entering retirement when annuity rates are especially low. Your fund remains invested and you take money directly out of the fund, using it as income.
There is no minimum amount, which makes income withdrawal reasonably flexible. If you don't need the income, you can stop withdrawing it at any time.
·The risk is that your income could be much lower in later years than it otherwise would have been. Success depends on strong investment growth and interest rates not moving in the wrong direction.
There are limits to how much income you take in this way. From 6 April 2011, the maximum is equivalent to 100% of the income you would get from a standard annuity.
A phased retirement plan works by dividing your pension pot into a number of segments. These are then treated as lots of little schemes, each offering tax free cash as well as annuity incomes, which you can draw upon at different stages.
The plus points
The benefits of phasing in your retirement benefits, is it enables you to build up your lifetime income gradually. This is particularly useful if you aren't going to stop work altogether but are intending to wind down to retirement by taking a lower paid, or part-time position, something which is becoming increasingly common as an alternative to stopping work entirely.
Make sure you are clear on all the additional costs associated with setting up and drawing multiple smaller-pensions. The extra administration involved with phased retirement schemes will ultimately cost more. You must also be aware that leaving funds invested may not work if investment growth is poor or if interest rates move in the wrong direction. You could end up with a lower income overall.
If you're unsure whether phased retirement is right for you, contact us for advice.
Who would consider an unsecured pension?
There are three key reasons people choose unsecured pensions above conventional annuities:
- Those who only need a small amount of the income that would be available from an annuity may wish to leave most of the fund invested while drawing a limited income;
- When annuity rates are low you, may decide to delay buying one in the hope that annuity rates will increase. There are no guarantees that this will happen. In fact the trends show rates will decrease as general life expectancy increases, which looks set to continue in the future; or
- If you want to leave the fund to your partner and any dependents, an unsecured pension means your money is more easily accessible.
Things to watch for with unsecured pensions
With all unsecured pension options, you are relying on strong investment growth to maintain the amount of income available in later years. Even good investment growth might not lead to better value with an annuity if interest rates fall.
Maintaining fund value
Not only do you need to outperform inflation with each unsecured pension option, you also need to replace enough of the fund value removed to maintain a reasonable fund value. When it reaches the stage of buying a lifetime annuity, the older you are, the more you'll need to compensate for the loss in fund value, which may lead you to invest in higher risk funds. This is not a route for the faint hearted.
Unlike a lifetime annuity where once bought the job is done, unsecured pensions need regular reviews. The ongoing advice and investment performance monitoring is necessary, as you'll need this information to respond to any issues.
Need more help?
So much will influence what's right for your individual retirement needs. It is vital with products this complex to speak to a specialist adviser. If unsecured pensions are something you are considering, we can help. Contact us today to set up an appointment with our specialist retirement adviser.
Help with Preserved or Paid-Up pensions
Some older style pensions have excellent features and benefits including:
- Guaranteed Annuity Rates- these are likely to be far superior to those currently available.
- High Allocation Rates – this enhances any further contributions.
- With Profits Funds- a potential terminal bonus may apply.
So, while some older schemes carry real benefits, there are others that do not, and they may suffer from the following disadvantages:
- Poor fund Growth – fund growth may be low or nil.
- Limited Fund Choice – this affects potential future returns.
- Lack of Technology – online account valuations or online fund switching for example.
- High Charges – reducing the effect of any growth.
- Poor Service from the Provider.
We are able to find out exactly what features and benefits your pension may have and advise accordingly. We just need your permission.
It may be in your interest to transfer to a more modern pension or simply leave things as they are. Either way you will have a better idea of exactly what you have and how much it will provide you in retirement. Preserved pensions can be transferred without the need to start regular contributions.
This service is provided free of charge and without obligation on your part.
We will contact the lender on your behalf to find out what you have,and explain it all to you in plain English. We are experienced Independent Financial Advisers relying on a long term relationship with our clients. We take pride in our service and many of our clients have been happy to recommend us to their friends and family; we hope that you will be able to do the same.
For advice on alternative retirement options we act as introducers.