Plan for a richer retirement
Sunday 18 October 1998
Final salary schemes offer a tax-free lump sum worth 11/2 times your leaving salary. But if income is a priority, it is often better to use this lump sum to boost your pension entitlement.
Employees can also increase their retirement savings through additional voluntary contributions (AVCs). These are employer-sponsored savings plans which you pay into tax-free. All employers offering final salary schemes must also offer these. In general, avoid "free-standing" versions of AVCs offered by insurance firms; you pay commission to a sales person.
Company pensions are almost always better than personal pensions because they carry lower charges. If employers do not offer final salary schemes, they may offer "money purchase" schemes - tax-efficient savings plans to which your company may or may not contribute. Under money purchase, the employer makes no guarantee about your benefits. However, the tax breaks are better than on other schemes, such as PEPs.
There is a danger as you approach retirement that your investments may suddenly lose value - drastically altering the income you can expect. Because most pension managers invest your savings on the stock market, the value of the funds can drop when the market falls.
There is a further risk in money purchase schemes and personal pensions: you must exchange your capital for an annuity - a contract provided by an insurance company to pay an income guaranteed until death.
The risk is that the amount of income you can get for your capital varies with the yield on the assets that back annuities - 15-year gilts. These can be subject to wild market fluctuations.
There is a way to minimise this risk. If a pension fund is fully invested in gilts, its value will reflect the cost of buying a gilt-backed annuity. As the annuity becomes more valuable, so will your fund. So there is no longer such a threat that your fund will buy less income when you retire and buy an annuity.
Because, in the last 30 years, shares have grown faster in value than gilts, it is best to be invested in shares until you near retirement. By gradually shifting to gilts, you can minimise the risk without missing out on growth potential. This is known as "lifestyle switching". Amazingly, fewer than 5 per cent of pension savers use this option.
- 1 Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Weather bomb in pictures: Storms cuts power for tens of thousands – and snow is on the way
Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
Russell Brand was rendered speechless on Question Time by this man
Fury at Airbus after it hints the super-jumbo may be mothballed
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Nigel Farage's approval rating hits 'record low' as popularity suffers in wake of Ukip sex scandal
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
Sony hack: Angelina Jolie branded 'seriously out of her mind' in further embarrassing leaked email saga
Panic Saturday: 13 million Britons spend £1.2bn – while 13 million others across the country live in poverty unable to afford food
iJobs Money & Business
$200 - $350 per annum: Carlton Senior Appointments: Managing Producer Office...
$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...
Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...