RESEARCH undertaken by Baring Asset Management (Barings) released exclusively to City A.M. estimates that 13.6m, or 38 per cent of British adults, don’t have a pension. This is worrying, as pensions remain the best option for those looking to hang up their working boots before popping their clogs – and the sooner you start the better.
POOR PENSION PLANNING
The most concerning statistic to come out of the Barings research is that almost half of 25-34 year olds, 47 per cent, have not started saving into a pension – a window of opportunity considered by many financial advisers as critical to establishing the foundations of a pension.
Chief investment officer at Barings Marino Valensise says “investing into a pension little and often is a much better approach than not at all.” James Sumpter of Bestinvest gives the example of a 25 year old saving 15 per cent of their income: “they could generate a retirement pot sufficient to provide a retirement annuity of 57 per cent of their salary at age 60, assuming growth of inflation, plus 3 per cent over that period, and a salary that increases in line with inflation.” Alternatively, “if they delayed saving until 35, then the same 15 per cent would produce an annuity of 35 per cent of their current salary, dropping to 18 per cent if they delay starting contributions until 45.”
HOUSING YOUR WEALTH
Pensions aren’t a one-stop-shop for retirement planning. However, as Alan Smith of Capital Asset Management explains: “the tax man will also pay in an amount based on your personal tax rate – for high earners, HMRC can contribute 50 per cent of the payment – there is no other savings vehicle that offers that level of tax break.” Jason Witcombe, a chartered financial planner at Evolve agrees, describing them as a “fantastic tax-planning tool,” adding “for anyone earning over £42,475 they are incredibly attractive from a tax relief point of view.” It has been suggested that using Isas instead of a pension makes sense – however, although they are more flexible, Isas are not as tax efficient, particularly for higher and additional rate taxpayers, while the ability to dip into them is a double-edged sword.
The research also reveals that 13 per cent of people said their property is their pension. This compares with 12 per cent in 2010 and just 8 per cent in 2009. According to Barings this is “a cause for concern given property prices have yet to recover fully from the lows of the recession.” Contradicting common misconceptions, Sumpter notes the FTSE All Share index rose 1,038 per cent in the last 25 years since 1986, while over the same period house prices have risen by just 367 per cent – 427 per cent in greater London. Tom Murray of Exaxe agrees, saying property is not a one-way bet. Murray says: “Lots of investors are currently nursing losses in the UK market and some of those who invested overseas have been very heavily burnt with collapses of prices in countries like Ireland, Spain and Bulgaria.”
As the state pension system is not dissimilar to a Ponzi scheme, don’t expect the government to have the resources to pay for your retirement. Smith explains that those relying solely on a state pension won’t starve, but will be snipping “2p off” coupons from the newspapers to pay for groceries: “Not an enjoyable way to live”.
No investment is watertight. Gordon Brown’s £100bn tax raid on Britain’s pension funds illustrates the threat posed by future governments, while the recent dip in the FTSE could have taken a chunk out of many peoples’ pensions. But regime uncertainty threatens all investments and there are ways of locking in value as you come towards your retirement, minimising the vagaries of the stock market.
Pensions have had a bad press of late, yet no matter how much you earn they are still the best option to ensure your old age is easier.