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Retirement might still seem like a lifetime
away and combined with the pinch of the credit
crunch, starting a pension may be the last
thing on your mind. But as you could end up
spending more than 30 years in retirement,
it is more important than ever to make plans
to save into a pension, and 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.
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.
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.
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 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.
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, 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.
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 |
|
The
remainder of up to £7,200 in
a Stocks and Shares ISA |
| Cash ISA up to £3,600 |
|
Stocks and Shares
ISA up to £7,200 |
With a pension plan you can contribute up to
100% of your salary into it (to a maximum of £235,000
for 2008/2009) 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.
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?
Much has changed recently, and will be changing
over the next few years, that will impact your
savings plans and retirement.
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.
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 2008/09 is capped at £235,000,
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 2008/2009
this amount is £1.65m, 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.
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 professional advice
from an experienced IFA.
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.
The Pensions world remains complex and baffling
for many of us. Choosing the right pension
provider, the most appropriate funds and agreeing
an affordable level of contributions can be
difficult to decide by yourself.
So contact us so that we can analyse your needs
and advise on the most suitable products for
your situation.
Bear in mind that there are over 35,000 financial
products in the marketplace and we can assess
your financial situation then suggest the most
suitable solutions.
We will: -
- Explain your investment
options
- Take you through the different
types of pensions on offer
- Assess your attitude to
risk Suggest the type of fund(s) that will
suit you
- Look at your earnings,
outgoings and priorities
- Indicate how much you
should be putting away each month.
All the advice provided will be set against the
background of your complete financial situation.
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