Why you shouldn’t put off saving for your retirement

AT A time when people are failing to save enough for their retirement, George Osborne’s move – announced in last week’s Autumn Statement – to reduce the tax relief on pensions is unwelcome. The chancellor cut the annual tax relief for wealthy earners from £50,000 to £40,000, and reduced the lifetime allowance from £1.5m to £1.25m. In an investment environment where safe growth and inflation-beating income are elusive, this presents a challenge to people planning for their retirement.

The new rules will hit those that were late to start their long-term retirement saving. This applies especially to middle-income earners, who are now making larger contributions to compensate for not starting sooner.

Critics of the rules say it sends out a negative message about long-term pension planning. But even though the tax position has become more punitive, it shouldn’t dissuade you from making retirement plans. A recent survey by BlackRock found that only one in three Brits are currently saving for their retirement, yet 47 per cent of those surveyed want to retire by the age of 65. As Tony Stenning of BlackRock says, there is a need for “Britons to be educated on the importance of saving regularly and as early as possible in their working life”.

A small consolation is that these thresholds will come into effect in April 2014, meaning that higher rate earners can still take advantage of the 50 per cent tax relief up to April 2013. From April 2013 to April 2014, the tax relief rate will be 45 per cent.

Catherine Penney of Barclays Stockbrokers urges investors to check whether they have any unused tax relief that they can carry forward from previous tax years. This can be used to offset against this tax years’ income. She adds that “everyone should consider taking advantage of their maximum allowances to save consistently for retirement”.

Fortunately, it is not all bad news for retirement planning. The chancellor has done another of his U-turns and decided to relax the drawdown rules to help those who are either retired, or will be retiring soon.

A drawdown pension allows you to put off buying an annuity when you retire. Instead, you can carry on investing in your retirement pot, and try to grow it further. Annuities currently offer very low yields that would make it difficult to get a reasonable retirement income, so this is a step in the right direction.

Under a drawdown scheme, you are still able to take an income. How much depends on your age, as well as other measures set out by the Government’s Actuary Department (GAD), including current gilt yields. The GAD table on the HMRC website will tell you how much you can withdraw as an income.

Where gilt yields were 2 per cent, for example, a 65 year old male with a retirement pot of £100,000 would be able to annually draw down £5,300 per annum under the old rules. But under the new rules, he will be able to withdraw £6,360 per annum. For a female in the same position, the old rules would allow her to withdraw £4,990 per annum; under the new rules, she could withdraw £5,880 per annum.

The government reduced the rate to 100 per cent 18 months ago, but it has since been increased to 120 per cent of the GAD figures. Jamie Matheson of Brewin Dolphin said that “this will help restore the flexibility for existing pensioners and to those retiring now”.

Drawdown schemes are suitable for those that still want to retain control of their retirement pot after they have retired. However, they are more risky than buying a simple annuity, and you must be happy to accept the risks that go with that. They include investment losses, fluctuating income, and even the possibility that you outlive your retirement pot. He also advises that, although these types of schemes offer you more flexibility, people need to also be mindful that, if they draw income at the maximum levels for more than a few years in a row, they are likely to run down the value of their pension pot fairly rapidly.