With major changes being made to Britain’s pension system, we all should be encouraged to save in a tax efficient pension.
20s Once you begin work, retirement is a distant thought. Other priorities tend to take precedence, like saving a deposit for a first home, paying down debts from student days or simply enjoying life.
The biggest influence on a comfortable retirement is the capacity to generate earnings. By starting a regular savings plan early, even if you can only spare small amounts, the returns will be much bigger.
Your earnings are generally low during this period but diverting the small amount left at the end of each month into a pension is likely to yield less than saving into an ISA, where the £15,000 tax-free annual allowance (from July 1 2014) will be more than sufficient.
The exception is your company’s pension scheme. Employers will pay on your behalf, for example, you might pay 5 per cent and the company 5 per cent.
30s During this period your earnings should start to increase, but you could have higher costs to possibly meet like getting married, starting a family or buying a first home.
You may need to create an ‘emergency fund’ to cover unexpected issues such as redundancy; a fund worth six months’ expenditure is generally the rule of thumb.
New parents may want to consider life assurance, which will protect family finances if anything happens to the main income.
Repaying mortgage debt will also take a large chunk of income. If you can afford to, invest as close to the £15,000 ISA limit as possible. You should also consider joining your company pension and consider increasing contributions if possible.
Pensions can help tax planning. Families where one parent earns more than £50,000 will start to lose their entitlement to child benefit.
Contributing to a pension can reduce your taxable earnings below £50,000 and preserve this benefit for your family.
40s If you haven’t started a pension type savings plan yet, it’s not too late. With up to 27 years before you collect your state pension and potentially more afterwards. Don’t be fooled into thinking your investment time-horizon is short; investments can still continue into retirement, for good returns.
During this period you may have school fees or other commitments to consider. Try to maximise the £15,000 ISA allowance, but don’t ignore the tax relief on pensions, though, which applies at your highest marginal rate. It costs a higher-rate taxpayer only £60 to put £100 into their pension.
Consolidate pensions sitting idle with former employers into a Self-Invested Personal Pension, or “SIPP”. These plans, which give access to thousands of investments in one place, are offered at low cost by different financial companies.
50s Saving for retirement should now become serious. From age 55 you will be able to access your pension. In theory you could retire then.
In reality, most people will continue working and plan carefully, saving as much as possible for the future as other expenses cease. Plan by working out how much income you’ll need when you eventually stop work. Pensions do work as tax-planning tools after your ISA allowance is used. Consider for every £2 you earn above £100,000,
you lose £1 of your tax-free personal allowance (currently £10,000). Contributing to a pension can reduce your taxable income so you retain this tax break.
Focus though on the £1.25m lifetime cap on saving. Someone aged 50 with £525,000 in a pension would push past the lifetime allowance by age 65 if the fund grew at 7 per cent a year even without additional contributions, according to pension provider Standard Life.
There is a currently a £40,000 limit on annual contributions to pensions.
60s Many people will continue working, into their sixties. With the new rules from next April, you have instant access to your entire pension fund, how and when you withdraw becomes a major decision. An annuity will guarantee a stream of income payments for life, but the cost of purchase is high.
For example, current rates pay just £6,000 a year for each £100,000 of savings. Shop around for the best rates, as they do vary between insurers and declare all health conditions to obtain the highest income.
The main alternative to an annuity is to keep your pension invested in the stock market and take income as you need it. This runs the risk of the ups and downs of the stock market.
The capital should be protected, a well-diversified set of dividend-paying funds and shares can provide a decent income, so long as you can put up with the fluctuating value of the underlying capital.
With the introduction of the new flat-rate state pension, probably in 2016, you will need 35 qualifying years of National Insurance contributions to benefit from the full £155 a week (it is possible to “buy” extra qualifying years). Check with the Pension Service on 0800 731 7898 to ensure you have the full amount.
Need more help?
This feature aims to give some informal hints and tips. Mcphersons are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters firstname.lastname@example.org or call our Head Office on 01424 730000 for a free consultation at mcphersons’ London, Bexhill or Hastings offices. www.mcphersons.co.uk
The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Please contact us for further information or if you are in any doubt as to the suitability of an investment.
McPhersons Financial Solutions LLP. Woodside, Junction Road, Staplecross, East Sussex, TN32 5SG Tel: 0844 804 0025 Fax: 0844 804 0390. McPhersons Financial Solutions LLP is the independent financial advice arm of McPhersons Chartered Accountants. McPhersons Financial Solutions LLP is an appointed representative of The On-Line Partnership Limited which is authorised and regulated by the Financial Conduct Authority. Registered Office: 23 St Leonards Road, Bexhill-on-Sea, East Sussex, TN40 1HH. Registration Number OC353077 (England and Wales). UK Residents only