Bridging the great pensions gap
No state income until the age of 66? It's time to take a personal interest in retirement planning, say Chiara Cavaglieri and Julian Knight
Sunday 11 October 2009
If the Conservatives win the election, we're all going to have to wait longer for our state pensions. Under Tory plans, from 2016, men will have to wait an extra year for their state pension, with the pensionable age rising from 65 to 66.
As things stand, the state pension age for women is already scheduled to rise in stages from 60 to 65 by 2020, and the present government plans to increase the pensionable age for both sexes to 68 by 2046.
These changes only emphasise the fact that for many people there will be an ever-increasing gap to fill between actual retirement and state pension age. With the state seemingly unable to provide for Briton's retirees, a problem set to become more severe with increased life expectancy, what tactics can be used to fill the void?
Delaying retirement and working longer is the obvious answer, but this isn't always viable or popular, so the solution for most of us will be to take retirement provisions firmly into our own hands. "The gap between the age at which we want to stop work, and the date from which the state will turn on the pension tap will need to be bridged somehow, and it is in everyone's interests to sort out how they will do it," says Joss Harwood, from independent financial adviser (IFA) Eldon Financial Planning.
If your employer offers a money-purchase, or final-salary scheme, make sure you opt in, particularly if it has a matched-contribution element in which the employer matches, up to a set level, every pound you pay in. Above all, it's important to take a more active interest in your retirement planning. If you have personal or company pensions keep an eye on them and review the investment performance regularly. It may be prudent to include a "lifestyle" option, which automatically switches your money out of risky shares and into safer investments such as cash and bonds as you near retirement.
If your employer does not offer a pension scheme, or you're self-employed, arrange one yourself. You receive tax relief on your contributions, increasing the money you put in by an amount equivalent to basic-rate tax, or 40 per cent if you're a higher-rate taxpayer. Stakeholder pensions are also an option because they must meet a number of minimum standards, including a limit on annual management charges of 1.5 per cent of your pension fund for the first 10 years, then up to 1 per cent thereafter. You can also switch to a different pension provider without charge, and contributions can start from £20, with no penalty fees for stopping or changing your payments.
Or, you can take a more hands-on approach with a self-invested personal pension (Sipp), but these aren't for everyone. Sipps are essentially flexible, do-it-yourself pensions with a wide range of investment choices, including the more straightforward options such as cash and government bonds, or more complicated investments such as individual shares, funds and commodities. "Contrary to popular belief," says Danny Cox of IFA Hargreaves Lansdown, "Sipps are not just for the mega rich." With a standard personal pension scheme, the provider chooses which funds to invest your contributions in, whereas a Sipp allows you to choose. However, with this flexibility come higher charges.
When you get into your sixties, if you have lots of little pension pots from previous employers, consolidating them is usually a good idea as many insurance firms won't offer competitive annuities to people with a pot of less than £10,000. However, another option is to take the pensions as individual lump sums. If those pots total less than 1 per cent of the standard lifetime allowance, currently £1.75m, it can all be taken as cash. So if you end up retiring with a pension pot worth less than £17,500, 25 per cent can be withdrawn tax-free, with 75 per cent liable for income tax.
Pensions aside, Individual Savings Accounts (ISAs) will play an important role for retirees. Like pensions, ISAs offer generous tax breaks and after changes came into play on 6 October, the over 50s can now shield up to £10,200 from the tax man. For the rest of us that allowance kicks in from the start of the next tax year. Of this, up to half (£5,100) can go into a cash ISA, with the balance available to invest in a stocks and shares ISA.
One of the biggest benefits to an ISA is that you can withdraw money from them more easily than from a pension. From next April, the minimum age at which you can get pension benefits will rise to 55 and you must use your pension pot to take out an annuity before you reach 75. With an ISA, you choose how and when to use the money.
Although pensions and ISAs should make up the bulk of your investment portfolio, having a mix of asset classes is crucial. "In an ideal world," says Mr Cox, "people should build income in their retirement from a number of sources: State pensions, employer or private pensions, and investments such as an ISA or even property."
Scottish Power hit with sales ban by regulator
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
There are 'dark corners' of the investment and pensions industry, says Pension Minister
Midweek Money: The end (of the tax year) is nigh: act now
Bank-beating exchange rates on your international payments
- 1 What happens to your body when you give up sugar?
- 2 Have sex with your iPad thanks to the new sex toy no-one asked for
- 3 The 'sex selfie stick' lets you FaceTime the inside of a vagina
- 4 Why you're almost certainly more like your father than your mother
- 5 Westboro Baptist Church couldn't picket Leonard Nimoy's funeral because they didn't know where it was
Durham Free School: 'Creationism taught at' free school facing closure
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
End of the licence fee: BBC to back radical overhaul of how it is funded
Nigel Farage promises Ukip will not 'stigmatise' would-be migrants – and says he wants 'everyone to speak the same language'
Ex-head of MI6: 'We shouldn't kid ourselves that Russia is on a path to democracy'
Most people think legal tax avoidance is just as wrong as illegal tax evasion, poll suggests
iJobs Money & Business
£8 per hour: Recruitment Genius: This Pension Specialist was established early...
£30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads