IT IS estimated that only one in three adults under 30 are putting any money at all into a pension scheme. And little wonder when young people’s primary concerns are paying off debts accumulated in student years, saving up for those 40 per cent mortgage deposits and, truth be told, enjoying life. Retirement seems far away and if the government has anything to do with it, it is becoming an even more distant prospect – the state pension age will be 68 for both men and women by 2046.
But while the prospect of putting your feet up might seem relaxing, actually paying for it does not. The Association of Independent Financial Advisers (AIFA) reckons that between 7m and 9m people are not saving enough for retirement. In 2008, the median average defined contribution (DC) pension pot when converted into an annuity was about £15,000. In today’s environment, this would generate a meagre income of around £920 a year. Or, put another way, to achieve a yearly income of £20,000 you would need a pension pot of around £300,000. To live on £80,000 per year in retirement, you would require £1.6m in your pot when you retire.
If you fail to sign up to a scheme, you will be left with the state pension and pension credits – currently £132.60 a week for a single person. Pensions experts are agreed that if your employer offers a scheme, you should definitely sign up. Employers sometimes offer to match your contributions so if you pay in 6 per cent of your salary every month, you’ll get another 6 per cent from them as well.
But even if you contribute to an employer scheme, research from the Pensions Institute showed that 69 per cent of the pension experts surveyed say that the typical investment arrangements in UK DC pension plans do not meet most members’ needs and they will not necessarily contribute enough to secure you a decent income in retirement.
While many people use ISAs as a form of long-term saving, pensions provide tax relief on incomes up to £130,000. If you are a basic rate tax payer then you will get an extra 20 per cent on any contributions and higher rate tax payers will get an additional 40 per cent subject to a self-assessment return. Chancellor Alistair Darling has announced that he will restrict tax relief on pensions to those earning more than £130,000, tapering to 20 per cent for those earning £180,000 from April 2011. If this applies to you, you are recommended to seek professional financial advice to work out what you are entitled to. However, unlike an ISA you cannot access your contributions until you start claiming your pension.
The earlier you start to contribute, the longer your investments have to grow. As a rule of thumb, broker Hargreaves Lansdown says that when you are starting to pay your pension, you should divide your age by two and then contribute that percentage of your salary into a pension scheme every year from that time onwards. So if you start paying into your pension aged 30, you should contribute 15 per cent of your annual salary.
When you retire, you can take up to 25 per cent of your pension in a tax-free lump sum and then either buy an annuity, which will pay out a regular income stream throughout retirement. These are good if you want the certainty of income in your retirement. Alternatively, you can enter into a drawdown arrangement where you take some money out of the fund on a regular basis but keep the rest of it invested. This has the advantage in that the fund can still grow in value but on the other hand, you remain exposed to market fluctuations.
There are essentially three types of personal pension plans open to investors: stakeholder pensions, personal pensions and self-invested pension plans (Sipps). Adrian Lowcock, senior investment adviser at BestInvest, recommends that you start off contributing to a stakeholder pension such as Scottish Widows. Offered only by insurance companies, these are the simplest form of pension scheme and have government restrictions on fees and access to the pension. There won’t be a great selection of funds available to invest in but the fees are capped at 1.5 per cent per year for the first 10 years and then 1 per cent per annum after that.
Personal pension plans offer you a much wider range of funds and may even give you access to funds managed by other providers. To access these you can either do your own research or seek the advice of an independent financial adviser (IFA) who can recommend providers to you.
Lowcock says that once you have accumulated around £40-£50,000 in your stakeholder pension or if you are making large contributions, you should think about transferring your pension in to a Sipp. These are, as the name suggests, managed by you and you can select from the whole range of mutual funds and also invest in shares, gilts and corporate bonds.
Hargreaves Lansdown’s pensions analyst Laith Khalaf says: “One of the benefits is the investment freedom and the ability to manage your pension online. You can view your account online and that is what people are used to.” However he warns that Sipp fees can vary dramatically – if you choose a Sipp that lets you invest in more risky asset classes such as commercial property you will end up paying much higher fees. For such a Sipp, you might have to pay a £500 set-up charge, an annual fee of £500 and then any transaction fees.
But low-cost Sipps are available – Hargreaves Lansdown has a tracker fund that has no initial charge and an annual charge of 0.27 per cent. Managing your own finances is becoming increasingly popular and for those experienced in markets, Sipps are one way to ensure you don’t end up working until you drop.