Why saving for the future is set to become simpler

Next month's pension reforms should make it far easier to save, says David Prosser

The most fundamental shake-up in pensions for almost 20 years happens on 6 April. On day one of the new financial year, the Government will finally dump some of the most tortuous tax rules on the statute book - and replace them with a single tax system for pensions. The reforms - known as A-day to pensions experts - will genuinely make it easier for people to save for old age.

The new rules will create opportunities for savers - as well as some nasty traps - and, just as importantly, make pensions far simpler.

To Charlotte Speedy, a 29 year-old public relations agency worker from Putney, south-west London, simplicity is the key. "I've not paid into a pension because everything seemed so complicated," she says.

Earlier this year, she started paying into a stakeholder pension run by Virgin Money. "I've been feeling scared about pensions for some time," Charlotte says. She chose Virgin because she felt more comfortable trusting the company than conventional pension providers.

One of next month's reforms could prove particularly useful to her. She plans to take time out of work to go travelling at some stage in the future. While she's away, Charlotte won't be earning, which under current rules would stop her making pension contributions.

However, under the new rules, even non-taxpayers will be allowed to contribute up to £3,600 to a private pension and still get tax relief. As Charlotte pays £55 a month into her stakeholder plan, her pension planning won't have to be put on hold.

When she returns, Charlotte may be able to take advantage of a second A-day reform. At the moment it is not usually possible to take out an individual plan, such as a stakeholder or personal pension, if you are a member of a company scheme. That rule is being abolished next month - instead, a single annual pension contributions allowance will apply (see story opposite).

As Charlotte's employer offers a scheme, this rule could be to her advantage.

The reforms will also benefit older people whose pension planning is more advanced. Pension experts expect self-invested personal pensions (Sipps), to play a much bigger role in many people's plans following the reforms. Stakeholder plans provide the base for saving, but Sipps offer a much wider choice of returns and are increasingly available for low charges.

They allow pension savers to invest in unit and investment trusts as well as individual shares, if they have the confidence.

John Francis, a 42-year-old double glazing salesman from Edmonton in North London, has had a Sipp with Alliance Trust for around five years. "What appeals to me most is that I'm in control of my own money," he says. "I used to have an Equitable Life pension and the collapse of that company hit me really hard."

John holds a range of investments through the Sipp, including holdings in Alliance's own investment trusts, a number of other unit trusts and a small portfolio of equities.

And from next month, pension savers will, for example, be able to invest in residential property for the first time - not directly in bricks and mortar, but through funds such as real-estate investment trusts.

See www.sippsupermarket.com for details of providers' plans.

What to do with your existing pensions

If, like many people, you have several pension plans, rather than all your savings in one place, it may make sense to consolidate them.

Tom McPhail, head of pensions at independent financial adviser Hargreaves Lansdown, says: "If you have several money purchase pensions [but not final salary plans run by an employer] bringing them altogether will simplify your administration and make it easier to get a good overview of your investments."

McPhail recommends savers make regular use of pension calculators such as the FSA's online service (see above right) to monitor how well their plans are progressing.

Savers who have with-profits pension plans also need to consider their options. Many of the insurers that offer these products have struggled to produce decent performance in recent years and some have introduced exit charges to prevent people taking their money elsewhere.

Working out what these pensions are likely to produce can be difficult, though in general, the higher the proportion of your money that is invested on the stock market, rather than in bonds or cash, the better your potential returns.

Weaker insurers have reduced the amount of money they invest in shares, so they are less likely to perform well. Depending on the penalty charges you would face to transfer, it may be better to move your savings.

What you can save each month - and what you need to put by

The rules on pension contributions are currently ridiculously complicated - how much you may invest depends on all sorts of factors, including your age and what type of pension you have. But from next month, life will be much simpler.

You'll be entitled to tax relief on contributions worth up to 100 per cent of your earnings each year, as long as your investment (including anything your employer offers) does not total more than £215,000. The only other restriction is a lifetime pensions cap (see story on page 15).

However, while this limit will be raised each year, to £255,000 by 2010, most people will be able to pay in far less. Tom McPhail, of Hargreaves Lansdown, says savers should aim for more realistic targets.

"As a broad rule of thumb, if you want to retire at 65, you should contribute a percentage of your earnings equivalent to half your age when you start saving," he says.

For a saver earning £20,000 at age 25, for example, an annual pension contribution of £2,500 makes sense. After tax relief, that would cost around £160 a month. Someone starting saving at 40, however, earning £40,000, might need to find £500 a month.

Every bit helps. According to the Office of National Statistics, the average household in Britain spends around £22,500 a year, or £1,875 a month.

The Financial Services Authority, which has a pensions calculator on its website ( www.fsa.gov.uk) suggests a basic-rate taxpayer earning £30,000 and starting a pension at age 35 would have to find £377 a month to generate such an income.

That assumes the saver is a man, that his pension has average investment returns and charge, and that he increases his contribution in line with inflation each year until retirement at age 65.

Independent Partners: 10 top tips for retirement. Get your free guide here

Voices
Homeless Veterans charity auction: Cook with Angela Hartnett and Neil Borthwick at Merchants Tavern
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm tomorrow
Arts and Entertainment
J Jefferson Farjeon at home in 1953
booksBooksellers say readers are turning away from modern thrillers and back to golden age of crime writing
Sport
Amir Khan is engaged in a broader battle than attempting to win a fight with Floyd Mayweather
boxing Exclusive: Amir Khan reveals plans to travel to Pakistan
News
Stacey Dooley was the only woman to be nominated in last month’s Grierson awards
mediaClare Balding and Davina McCall among those overlooked for Grierson awards
PROMOTED VIDEO
Voices
Joseph Kynaston Reeves arguing with Russell Brand outside the RBS’s London offices on Friday
voicesDJ Taylor: The great tradition of St Paul and Zola reached its nadir with a worker's rant to Russell Brand
News
Twitchers see things differently, depending on their gender
scienceNew study shows that birdwatching men have a lot in common with their feathered friends...
News
i100
Arts and Entertainment
Caroline Flack became the tenth winner of Strictly Come Dancing
tvReview: 'Absolutely phenomenal' Xtra Factor presenter wins Strictly Come Dancing final
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
life
News
Xander van der Burgt, at the Royal Botanic Gardens, Kew
scienceA Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
film
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

    $125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

    Sheridan Maine: Commercial Finance Manager

    Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Sheridan Maine: Regulatory Reporting Accountant

    Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Day In a Page

    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
    The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

    The 12 ways of Christmas

    We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
    Birdwatching men have a lot in common with their feathered friends, new study shows

    The male exhibits strange behaviour

    A new study shows that birdwatching men have a lot in common with their feathered friends...
    Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

    Famous diaries: Christmas week in history

    Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
    From noble to narky, the fall of the open letter

    From noble to narky, the fall of the open letter

    The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
    A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

    A Christmas ghost story by Alison Moore

    The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
    Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

    Marian Keyes

    The author on her pre-approved Christmas, true love's parking implications and living in the moment
    Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

    Bill Granger's Christmas Eve fish feast

    Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
    Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

    Rodgers fights for his reputation

    Liverpool manager tries to stay on his feet despite waves of criticism
    Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

    Amir Khan attacks the Taliban

    'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
    Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

    Michael Calvin's Last Word

    Sepp Blatter is my man of the year in sport. Bring on 2015, quick