at birth - but it's never too late
You can now have a pension as
soon as you are born. A doting relative can pay up to £3,600 a year into
one of the Government's new stakeholder plans. For a basic rate taxpayer
this works out at an outlay of £2,808 from April, after tax relief. It
does not matter if the payment is made for someone who is not a taxpayer,
but high-earning benefactors should note that they cannot claim the
difference between basic rate tax and the higher rate, of 40 per cent.
The money can be paid from
savings rather than earnings, as it was under the old personal pension
rules. Given the powerful effect compound interest (see feature page 13)
can have on small investments held over a long period of time, this could
provide a child with a good start towards a reasonable pension.
In your twenties
For most of us, this is the
point when retirement planning should begin.
Figures from insurer NPI show
that a 25-year-old must put £233 a month, topped up to £299 by tax
relief, into a stakeholder pension to achieve an income at 65 equivalent
to £15,000 a year now. A 40-year-old with no pension would have to spend
£451, or £579 after relief.
It is important for young women
to build pensions of their own because of the way time off to bring up
children can play havoc with income. Marriage breakdown later in life can
stretch finances, and when you retire you discover that every pound saved
could buy you 8 per cent less in income than a man (see 'in your
Twentysomethings seem acutely
aware of the need to save for retirement, even though their spending may
outstrip their commitment. A pension should not be the dominant financial
aim if you have debts however.
Jackie Holmes, of accountant
PriceWaterhouse Coopers, says: 'Probably the priority needs to be to pay
off debt, and you have to look at affordability. It is important to look
at what other commitments you have, especially if you have a mortgage.'
If your debts are under
control, your priority should be an employer's scheme if it is available.
'It is a no-brainer that you should join it,' says Holmes.
The company will contribute up
to 10 per cent of your salary to the fund, while you will pay, perhaps, 5
per cent. Some employers have pensions that require no contribution by the
employee - a particularly valuable benefit.
If your employer has no scheme,
the main option now is a personal pension, although from 6 April the new
stakeholder pension will be available (for details see box). Employers
without schemes of their own will be obliged to give access to stakeholder
plans by October, and nominate a provider. But they won't have to pay into
a stakeholder plan (see below).
Many insurance companies are
already offering personal pensions that mirror the stakeholder plans they
will offer from April, so these are worth considering.
But John Turton of adviser Best
Pension says it may be worthwhile waiting to see what an employer offers,
even if they do not contribute.
'If an employer introduces a
scheme charging 0.7 per cent against an outside stakeholder charging 0.9
per cent, little things like that matter,' Turton says.
Don't forget that while a
pension has good tax breaks - up to 40 per cent on contributions - you can
also supplement pension savings with other forms of investments such as
Individual Savings Accounts. If you delay starting a pension you should
certainly still be setting aside long-term savings.
In your thirties
Act now if you want to have a
pension equivalent to between half and two-thirds of your income. You may
need to save more than 10 to 15 per cent of salary if you've done nothing
A rule of thumb used by
pensions experts suggests that to work out what you should be saving for
retirement, halve your age and invest the equivalent percentage of income
in your pension. So by your late thirties, if you've done nothing so far
you need to start with contributions of nearly 20 per cent. If you took
out a personal pension five years ago, paying £25 a month and have not
increased contributions since you will almost certainly need to bump up
If you're starting from scratch
an employer's scheme should be the first thing to look at. If you want to
catch up on saving not done in your twenties, and you have access to an
employer's scheme, look at its Additional Voluntary Contribution plan. If
the employer will pay into your AVC it's hard to argue against this form
But you might also want to use
a stakeholder pension. This is because the proceeds of AVC schemes must be
used entirely to buy an annuity. Annuity rates are low and likely to
remain so. A stakeholder scheme allows you to take 25 per cent of the
maturity value as a cash lump sum which you might be able to invest for a
higher return or use as you wish when you retire.
Pension rules limit the amount
you can contribute to a company scheme - including AVCs - to 15 per cent
of your salary. But if you earn less than £30,000 a year you can put
another £3,600 into a stakeholder plan. Another option is the free
standing additional voluntary contribution scheme (Fsavc), a private
version of the company AVC.
Charges tend to be high and
most people should consider their company scheme first and then a
If you don't have access to an
employer's scheme, look at a stakeholder or, possibly, a low-cost personal
If you want to save more than
the rules allow, look first at other forms of saving with tax breaks,
primarily Individual Savings Accounts where you can now contribute up to
£7,000 a year. Then try investments that don't carry tax breaks, such as
unit trust or investment trust savings schemes. Remember, there is nothing
magical about a pension; it is merely a wrapper around investments that
will one day provide an income.
If you took out a personal
pension in your twenties you may be wondering whether to transfer your
funds into a stakeholder plan, or to divert your monthly savings to one of
the new schemes. Transfers can be expensive because of exit penalties.
Even so, Best Pension adviser
John Turton has just done a forecast for a client who stands to have his
£13,500 fund reduced by £5,600 on transfer.
'He will be 0.4 per cent better
off he he jumps to stakeholder,' says Turton, who stresses that people
usually need independent advice to work out whether a transfer is
For older savers with schemes
that had high initial charges, a switch is less likely to be worthwhile.
Others will want more choice of investment funds than is likely to be
available in stakeholder plans.
Another issue is whether your
personal pension firm plans to cut its charges to bring them in line with
those of stakeholder plans.
Even if you started a pension
in your twenties, planning can become trickier and more time consuming if
you have taken career breaks to bring up children. Broken income means
that you may not be able to afford to contribute to a pension.
Employers must continue to
paying into occupational schemes for women on paid maternity leave. If you
are receiving statutory maternity pay you will need to claim national
insurance credits towards your state pension, though you should receive
them automatically if are receiving maternity allowance. If you don't
return to work, you should get automatic state pension credits after
claiming child benefit for a year.
Mothers who do not carry out
paid work will be able to save in a stakeholder pension, or their partners
can contribute for them.
The thirties might be the time
when you start a business, or become self-employed. You will then be on
your own for pension provision. Stakeholder pen sions, or personal
pensions are suitable for middle-income earners, but higher earners who
like managing their investments might consider small self invested pension
schemes (Sipps, see below), which allow you to choose your own, while
contracting a specialist to do the administrative work.
Until recently these schemes
were viable only for pension savers putting away £10,000 or more a year.
But a new breed of internet-based Sipp providers is reducing costs and
opening them to a wider audience.
The pioneer was Sippdeal, which
has a start-up fee of £100 and a minimum dealing charge of £50.
If you are running a small
business you may want to consider a Small Self Administered Scheme, which
will allow your firm to invest in its own property, or to set up a company
scheme (if you're employing more than five people, remember that you have
to offer a stakeholder plan), but this is an area for specialist advice.
In your forties
Retirement is coming closer, so
it is time for more detailed planning. If you have done nothing about a
pension yet, you will be shocked by the large amount you will now have to
contribute. From a standing start, you may need to save between 20 and 25
per cent of income. Even if you have been saving steadily, this is the
time to think about when you will want to retire and whether you need to
top up your savings. You can obtain a forecast for your state pension by
asking for form BR19 from Department of Social Security offices.
Don't forget to ask about any
entitlement to the State Earnings Related Pension Scheme (Serps), the
top-up state plan for employees. Contact past employers' schemes for
forecasts of what these might produce. If you've lost track of a past
scheme, contact the Occupational Pensions Regulatory Authority (tel: 01273
627600) which operates a tracing service.
If you need to top up an
employer's scheme you can, as in your thirties, use an AVC, buy extra
entitlement through 'added years' schemes or use a stakeholder pension. If
you are making your own arrangements, make sure you are paying enough into
your plan to keep you on track. However, if you are catching up and have
little money to spare consider whether you can really afford to lock away
savings that cannot be accessed until you retire. If you expect to have to
finance children through university, for example or to fund an endowment
shortfall and you are also under-pensioned you may need to save in an Isa
or through unit trusts or investment trusts that allow you access to your
cash at short notice.
Don't forget that paying lump
sums off a mortgage are a form of saving. Early repayment can save tens of
thousands of pounds over the life of a mortgage, putting equity into a
home that you might consider swapping for a smaller one when you retire.
Another option might to buy property to rent out.
Many middle aged divorced
women, in particular are now facing up to the possibility of financial
difficulty in retirement because they had no independent pension. The
courts can now split pensions between divorcing partners, giving one a
transfer value from the other's scheme to put into a pension of their own.
Alternatively the courts can make an 'earmarking' order allowing one
partner to collect a pension in retirement from the other's scheme. The
splitting arrangement is likely to become more common than earmarking as
it allows for a clean break.
If you are in a stable,
long-term relationship with a partner who has a good pension but you are
not married, this may be the time to tie the knot. Some schemes do not
automatically grant pensions to unmarried partners.
In your fifties
If you've saved steadily since
your twenties, reviewed your pension regularly and knew you wanted to
retire early, congratulations. You may now be able to cash in.
If you are 50 and want to
retire at 55, however, the sad truth is that you are unlikely to be able
to afford it unless you have worked continuously for an employer with a
top scheme, and it is prepared to pay you a handsome early retirement
For many fiftysomethings, this
will be a period of frantic catching-up, with retirement only years away.
You need to review your pension forecasts (as for the forties, above) to
see where you stand. A well funded personal pension may allow you to
retire from 50 onwards.
If any part of your pension
depends on a 'money purchase' arrangement - which means it is invested in
the stock market, rather than depending on your salary - you need to start
looking at whether money should be transferred from high-risk to medium or
low-risk investments. Most schemes prompt you over this, but check if you
Start acquainting yourself with
the finer points of annuities and their pitfalls. These provide annual
income and are bought with the proceeds of money purchase pensions. A man
of 65 retiring with a £10,000 fund today would receive less than £900 a
year, while a woman might get only £800 because she is likely to live
longer and need more income.
This does not provide for any
form of inflation proofing or any repayment to your estate if you die
within five years of taking the annuity. These guarantees would mean an
even lower income.
If you are still topping up
your pension you may need to weigh up the tax breaks on AVC contributions
against the flexibility of investment outside pensions. If you are saving
in AVCs you may want to consider diverting that money to something more
flexible that does not require annuity purchase, but remember that returns
from most forms of investment are likely to be in single figures, unless
you take a big risk with your money.
In your sixties
If you haven't yet retired,
look at whether any of your pension fund is invested in high risk funds.
If you have money in AVCs or other 'money purchase' plans you need to
start looking seriously at annuities.
Peter Quinton of specialist
adviser the Annuity Bureau believes that as many as 50 per cent of buyers
go to the company that managed their pension funds when they might raise
their retirement income by at least 10 per cent per cent by shopping
Women reaching retirement will
quickly discover that they do significantly worse out of annuities than
men because of their longer lives.
A woman of 60 retiring with a
£100,000 pension fund could expect less than £7,500 a year from one of
the best annuities, against £8,029 for a man.
Another option is to consider a
with profit annuity, where the income depends on bonus. Returns on these
now compare favourably with those from conventional annuities, although
they may not always give a higher return when you first retire. The hope
is that income may rise, rather than remain static and at low levels as
with a conventional annuity. The disadvantage is that your annual income
is not guaranteed because returns on with profits funds vary from year to
For people with large funds,
the main alternative to an annuity is an income drawdown plan, or a phased
Both of these schemes involve
leaving your pension fund invested to continue to growand drawing an
income meanwhile, or taking sections of the fund to convert to annuities
You must convert pension funds
to an annuity by the time you are 75. The Income Drawdown Advisory Bureau,
a specialist adviser, usually recommends this only for investors with
funds of at least £250,000.