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

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

    SThree: HR Benefits Manager

    £40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

    Recruitment Genius: Office Manager / Financial Services

    £30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

    Jemma Gent: Year End Accountant

    £250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

    Jemma Gent: Management Accountant

    £230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

    Day In a Page

    The difference between America and Israel? There isn’t one

    The difference between America and Israel? There isn’t one

    Netanyahu knows he can get away with anything in America, says Robert Fisk
    Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

    David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

    The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
    With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

    Money, corruption and drugs

    The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
    America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

    150 years after it was outlawed...

    ... America's first slavery museum is established in Louisiana
    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
    Tony Oursler on exploring our uneasy relationship with technology with his new show

    You won't believe your eyes

    Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
    Yvette Cooper: We can't lose the election. There's too much on the line

    Yvette Cooper: We can't lose the election. There's too much on the line

    The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
    A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

    It's not easy being Green

    After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
    Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

    Gorillas nearly missed

    BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
    Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

    The Downton Abbey effect

    Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
    China's wild panda numbers have increased by 17% since 2003, new census reveals

    China's wild panda numbers on the up

    New census reveals 17% since 2003
    Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

    Our woman in Beijing builds a new relationship

    Britain's first female ambassador to China intends to forge strong links with growing economic power
    Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

    Courage is rare. True humility is even rarer

    Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor