Moving on

Planning for your retirement

Looking forward to life after you stop working is something we all do. Unfortunately, planning ahead to make sure that your retirement is comfortable and money worry-free is less universal.

No matter what age you are, it’s always a good time to start retirement planning – and the earlier you start, the better.

Retirement planning is different for everybody, because no two people and their circumstances are the same. Seeking professional advice is a wise move but if you haven’t considered retirement planning before, it’s sensible to start by considering some key issues.

The big questions

Effective retirement planning begins by answering some big questions.

At what age would I like to retire? You may have an idea of when you’d like to stop work, but you need to think about when you can draw retirement benefits from a registered pension arrangement (not your state pension).

At present, the earliest age is normally 50 and from 6 April 2010, this will rise to 55. You must also start drawing retirement benefits in some form by 75.

Should I retire at the same time as my partner? If you both have your own pension arrangements, it is likely that one of you will stop work early if you both retire when the first partner reaches their pension scheme’s normal retirement age. You need to consider the financial implications of this.

What happens if I become ill when I get older and need long-term care? And how long am I likely to live? These are questions that no-one really likes to think about. But you may want to make some sort of provision in case of long-term illness and your life expectancy could be a factor in your retirement planning.

How much money will I need? As you grow older, your expenses will change. You will almost certainly have paid off your mortgage and you won’t have the costs associated with work, such as commuting costs.

But the last thing you want to do when you retire is have to count every penny. Perhaps you’d like to take more holidays than when you were working. You may need to buy a car to replace a company vehicle, or you may want to invest in private medical insurance, and you will need the funds to allow you do all this.

Thinking about pensions

For most people, pension income will be the financial foundation of their income in retirement. This income can come from a variety of sources.

State benefits

Assuming that you have paid national insurance contributions (NICs) or been given credits for these, you will be entitled to certain state benefits on retirement.

The basic state pension: To receive a full basic pension, men who reach 65 before 6 April 2010 need 44 years’ worth of NICs or credits. Women who reach 60 before the same date need 39 years. From 6 April 2010, both sexes will need only 30 years’ worth of NICs or credits.

The state second pension scheme (S2P): If you belong to your employers’ final salary pension scheme, you are almost certainly already contracted out of S2P, which replaced the State Earnings-Related Pension (SERPS) in 2002.

If you are employed, but not a final salary scheme member, you are likely to have the option to contract out of S2P into your employer’s money purchase scheme or your own personal pension. This option is set to end from 6 April 2012.

The basic state pension and S2P rise in line with the Retail Prices Index, but at some point between 2012-2015, the basic pension will be linked to the rise in earnings.

Pension credit: This is a means tested benefit to provide a minimum income. The starting age for claiming of 60 will rise to 65 between April 2010 and April 2020.

Claiming your state pension

The age at which state pensions are paid will gradually rise over the next 40 years. For women, the age will rise from 60 on 5 April 2010 to 65 by 6 April 2015.

For both sexes, the age will rise from 65 to 66 between 6 April 2024 and 6 April 2026, followed by further one year increases in 2034-2036 and 2044-2046. By 6 April 2045, the state pension age will be 68.

You cannot claim your state pension before the designated age, but you can defer it for as long as you wish.

You can earn an increase to your state pension of 1 per cent for every five weeks you put off claiming - about 10.4 per cent extra for every year you delay claiming.

If you put off claiming your state pension for at least 12 consecutive months, you can choose to receive a one-off lump sum payment and your state pension paid at the normal rate.

The lump sum, when you claim it, will be based on the amount of normal weekly state pension you would have received, plus interest. You can put off claiming your state pension for as long as you want in order to earn extra pension or a lump sum payment.

How much will I receive?

The Pension Service currently can currently only provide projections of pension entitlements to people reaching state pension age on or before 5 April 2010, due to changes in state pension rules that may affect entitlements after this date.

For information on obtaining a projection, go to the Pension Service website at www.thepensionservice.gov.uk/home.asp

Occupational pensions

You may belong to your employer’s pension scheme, which may be either a final salary or money purchase scheme.

If you have worked for a number of years, it is likely that you have several pension schemes with different employers. You should receive an annual statement from each scheme, including the benefits that you can expect to receive, at the scheme’s normal retirement age, in today’s money terms.

If you do not have up to date statements, contact your pension provider as you will need this information to assist your retirement planning.

Other pension options

If you do not belong to an occupational pension scheme, there are other pension options. These include:

Stakeholder pensions

Stakeholder pensions accept monthly contributions starting at £20 and investors can stop their contributions, at any point, without penalty. The annual management charge (AMC) is capped at 1.5 per cent for the first ten years and one per cent after that. By law, there are no fees for transfer or early retirement.

When an investor nears retirement, their pension “pot” will be switched from equities (shares) into fixed interest securities and cash. Some providers may offer access to investments managed in-house

Stakeholder pensions are a good option for people without access to a company pension scheme but the investment options are limited.

Personal pension plans

Personal pension plans, or PPPs, offer many more funds to investors than stakeholder pensions, some managed internally and some provided by external investment houses.

Some PPPs charge an AMC of 1.5 per cent or more, although investors with substantial sums may receive a rebate.

Potential PPP investors need to balance the greater accessibility to funds and fund management groups against the possible costs when deciding to go for this option.

Self-invested personal pensions

A self-invested personal pension, or SIPP, is available from SIPP providers approved by the Financial Services Authority.

SIPPs come in two versions. The hybrid (or deferred) SIPP is usually offered by insurance companies, who require the investor to put some money into the provider’s own funds. In some cases, the provider will offer SIPPs better terms than for other investments.

Pure SIPPs provide access to most investments, including cash deposits, commercial properties, equities, fixed interest securities and futures and options.

You can manage your SIPP yourself or SIPP employ a professional fund manager, who will make an annual charge for this, plus fees for advice and administration. A SIPPs wrapper – the vehicle by which the SIPP is managed, separate from its contents – will also come with a setting up charge and an annual fee, plus transaction fees, depending on the type of investment.

SIPPs are likely to offer greater benefits than stakeholder pensions or PPPs for investors with large sums.

How much can I contribute to my pension?

In any tax year, pension contribution rules allow:

• You to contribute up to 100 per cent of your earnings, receiving full tax relief

• Your employer to contribute as much as they wish, although HM Revenue & Customs may not allow full tax relief if they think the contributions are too high.

If pension contributions from you and your employer exceed the annual allowance - currently £225,000, rising to £255,000 by April 2010 - the excess will be taxed at 40 per cent.

There is also a lifetime allowance of £1.6 million, rising to £1.8 million by April 2010.

Other investments

You may be in a position where you have additional cash to spare for investment, as another source of income when you retire. Or when you do retire, you may receive a tax-free lump sum as part of your pension, which you may want to put to work for you.

While it’s always a good idea to have some money in the bank or building society for a rainy day, investing is for the longer term. Investment products also vary in the degree of risk involved – the higher the risk, the greater the potential return is likely to be.

There is no “one size fits all” in deciding how to invest your money. Each investor has a different amount of money at their disposal, different goals for what they want to achieve and a different approach to risk, so their investment portfolio must reflect their particular circumstances and priorities.

Investment risk

Low risk investments include products such as deposit accounts and government bonds. Interest rates will be lower but your original investment – your capital – will be secure.

Medium risk investments include corporate bonds – money loaned to companies – and with-profits bonds, which combine shares, cash, property and bonds to give more potential growth than a deposit account.

High risk investments include investment trusts and shares. With this type of investment, their return is linked to stock market performance, so there is potential for big gains but also the loss of your capital.

Types of investment

Some popular types of investment include:

Annuities: an annuity is a series of regular payments received in exchange for a lump sum, giving you a guaranteed, predetermined income for life. They can represent good value if you live to an old age, but because they die with you, or your spouse, they are poor value if you die early.

ISAs, or Individual Savings Accounts, allow you to save up to £7,000 (£7,200 from April 2008) each year, without paying any tax on the interest you earn. There are different types of ISA: cash only, stocks and shares only or a combination of the two. If you only wish to invest cash, the limit is £3,000, rising to £3,600 from April 2008.
Unit trusts use a pool of money from investors to buy shares. This limits the investors’ risk, as their money goes into a spread of investments, chosen by a professional fund manager. Fresh investors can come into these trusts at any time.
Investment trusts are companies that buy shares in other companies. They only have a fixed amount to play with – the money invested by trust members when the trust is set up.
Property has been a popular investment route, although currently the market is slowing down. However, you may want to help your children take a first step on the property ladder, or perhaps to buy a place in the sun as a retirement or holiday home.
Conclusion
From this introduction to retirement planning, you will see that the process is a complex one, with many different factors to consider.
You could spend a third of your life in retirement, so it’s certainly worth investing time and money now to make sure that you enjoy a comfortable standard of living once you give up work.
Taking professional advice is a wise move. And remember that retirement planning should be an ongoing process, so that your plans and investments continue to reflect any changes in your circumstances.

For more information on how Harris Lipman can help, please email InfoAccounts@harris-lipman.co.uk or call (020) 8446 9000.

 

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