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, it is more important than ever to make plans to save into a pension, as well as keeping a close eye on how much you’re saving, what investments you are choosing 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 start, but you can’t rely on it! The current full weekly allowance for a single person is £97.65 which adds up to around £423 a month if you’re on your own. Changes have been made to the qualifying conditions from 6 April 2010 for receiving the state pension, and also the ages at which it comes into payment. For women who reach their state pension age on or after 6 April 2010, the number of qualifying years of national insurance (NI) payments needed for the full basic state pension of £97.65 a week will reduce from its present level of 39 years to 30. For men it used to be 44 qualifying years to get the full basic state pension but who will, from the same date, now only need 30 years.

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 may have benefitted from a final salary pension scheme (also known as a defined benefit scheme) from 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 these schemes.

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.

17% of people don’t know what pension their employer provides, according to Towers Perrin research, so make sure you’re not one of them!

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 employers' 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.

To find out where you stand in terms of making pension provisions, 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 read on 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 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 golden 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.

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 £10,200 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 £10,200 in stocks and shares in the 2010/2011 tax year in an ISA. Up to £5,100 of this amount can be saved in cash with one provider. The remainder of the £10,200 can be invested in stocks and shares with the same provider.

There is an overall maximum investment limit for ISAs and each type for the 2010/2011 tax year which follow:

ISA type	Allowed in the tax year
Stocks and Shares ISA	Up to £10,200
Cash ISA	Up to £5,100
Combined maximum	Up to £10,200

Personal pensions

An individual receives relief at their marginal income tax rate on their pension savings. Although there are no limits to how much can be saved in registered pension schemes, the maximum tax relief available in any one year for pension savings is limited to 100 per cent of a person’s earnings and by what is called the annual allowance. The annual allowance for the 2010-11 tax year is £255,000.

The Government has announced its intention to restrict, to the basic rate of income tax, tax relief on pensions savings with effect from 6th April 2011 for people with taxable income of £150,000 or more. There a number of anti forestalling measures in place to avoid these high earners making large pension contributions before the start of the 2011 tax year.

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.

If you want to get an idea about how much your savings could be worth when you retire, or if you want to find out what you should be putting away and the impact of delaying starting saving for a few years – then have a look at our useful Cost of Delay tool.

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, visit an independent financial adviser.

Pension simplification and what it means to your pensions savings

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 2010/11 is capped at £255,000, 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 2010/2011 this amount is £1.8m, 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 £1.8m, 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 £1.8m 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 £1.8m 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.

State Pension age is the earliest age you can claim your State Pension. The limits are:

65 for men born before 6 April 1959
60 for women born before 6 April 1950
This age is increasing and from 6 April 2020 the State Pension age will be 65 for both men and women.

The government is looking to delay the age at which people can claim a state pension and allow people to be able to work beyond 65 if they want to and are able to. At present, an employer can force an employee to retire or refuse to employ them beyond 65 without giving a reason. Employers can also refuse to take on anyone above the age of 65. This content will be updated when the government announces further pension changes.

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 has as of this year been reduced 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.

NEST pensions – the new work place pension plan from 2012

The National Employment Savings Trust NEST is the new name for what was previously referred to as Personal Accounts – a new pension scheme targeted at low to middle moderate income workers to be launched in 2012. The impetus for the scheme is that the over 65s will have doubled in number by 2055, and based on current projections around seven million of them aren’t saving enough to have a pension that meets their demands. Is the name of a UK pension scheme that is scheduled to come into effect in October 2016.

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 a NEST pension 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 a NEST pension 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 and the costs not as attractive as expected with a with a temporary 2% charge on each contribution and a 0.3% annual account management levy on the pension pot, it may be worth seeking financial advice about whether you should opt out or not of a NEST pension.

Finding a pension IFA

The range of qualifications an IFA can have in order to be able to give specialist pensions advice is expanding, reflecting the changes taking place with pensions regulation. When choosing an adviser to give you pensions advice, there are other qualifications for consumers to watch out for, such as the advanced pensions paper, “G60”, or “AF3”, exams “J04” and “J05”, which deal with post-retirement planning, and the APMI pension qualification. There is also the pensions simplification paper CF9.

Those shopping around for independent financial advice should be sure to enquire about the qualifications an adviser has, but should also bear in mind it might be as helpful and meaningful to enquire about an adviser’s experience in certain areas.

Many IFAs offer the first half hour consultation free of charge, giving you an opportunity to find out more about their expertise and how they will be able to help you.

Finding an adviser in your neighbourhood is easy. IFA Promotion holds the details of over 8,000 IFA firms throughout the UK on its database, along with details of advanced pension qualifications held by these IFAs. By visiting www.unbiased.co.uk, you can obtain details of local IFAs with additional specialist pension qualifications.

An IFA will be able to help you decide what action to take. Questions include:

How much should I save into my pension?
How much can I save without incurring a tax penalty?
What are my options when I come to take benefits from my pension?
Now the tax treatment for all types of pensions is similar, how can I tell which are best suited to my needs?

For further information on the subject, please contact your IFA. To find an IFA in your local area, please use our ‘find an IFA’ search which enables you to search for an IFA local to you based on your postcode and a range of other criteria such as area of advice, qualifications and payment options.

This guide was created by IFA Promotion Ltd (unbiased.co.uk) and has been approved by a person authorised and regulated by the Financial Services Authority. This guide is based on IFAP’s understanding of current legislation, tax and pension contribution regime and is liable to change in the future. The value of tax benefits will depend on your personal circumstances. The name IFA Promotion®and the Independent Financial Adviser (IFA) logo® are registered trademarks of IFA Promotion Limited.

April 2010