Here’s a quick and easy way to save £10,000 for your retirement – without using a pension! Use our method and you will get 14% a year on your savings.
The government’s plans for a new form of low-cost pension scheme from 2012 mean that for many people, starting a stakeholder pension plan now doesn’t make sense. Instead, here’s how to collect 14% a year on your retirement savings.
And if you are already contributing to a stakeholder plan but pay in less than £150 a month, there could be a better way to maximise the return on your money over the next five years.
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Looking for free pensions advice? Learn more hereThe new NPSS plans will have much lower chargesThe National Pension Savings Scheme starting in 2012 will offer a far better deal than stakeholder pensions, because the NPSS annual charge will be slashed by four-fifths from the standard stakeholder charge of 1.5% a year to about 0.3%.
That will make a huge difference to the amount of capital a regular saving will accumulate over a 30-year period. For example, assuming a pre-charges level of return of 5.3% annually, a NPSS scheme would deliver £83,200 for a flat £100 per month, whereas a plan with stakeholder charges would accumulate just £67,000 for the same contributions.
Thanks to the lower NPSS charges, you end up with almost 25% more capital for the same monthly outlay.
Check out our Self-Invested Personal Pension best buysStakeholder plans are now unattractiveSo unless you are offered membership of a stakeholder scheme where your employer makes a contribution, it doesn’t make sense to start a stakeholder plan now. It might make sense if you could transfer the cash you accumulate in a stakeholder plan into the NPSS when it launches, but the government has already said this won’t be allowed. So putting money into stakeholder means paying its high charges until you retire.
On the other hand, everyone needs to save for their retirement and using the arrival of NPSS in 2012 as an excuse for not saving now would be a feeble cop-out.
Take advantage of the NPSS first-year windowThere is a sensible solution, though, and one that could earn you a whackingly good return of 14% a year. It’s based on the promise the government has made that it will allow people to put up to £10,000 into the NPSS in its first year of operation - a sort of kick-start or catch-up for those who haven’t got enough retirement savings.
All those contributions will be eligible for tax relief, so that you’ll only have to pay in £7,800 to have £10,000 invested in the fund- the rest will come from a tax refund.
So the way to get most bang for your buck is to try and accumulate £7,800 by 2012 but not in a stakeholder pension plan. You could just use a deposit account, but my recommendation is to set up a
self-select ISA within which you invest your regular contributions in our top
Best Buy UK index tracker fund -
Fidelity Moneybuilder UK Index.
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Order free brochures on Self-Select ISAs hereThe stock market is the best place for long term savingsThe Fidelity MoneyBuilder UK Index tracker has annual charges of just 0.3%, bang in line with NPSS, and gives you a simple, plain vanilla investment in UK shares. So long as the money’s going to be in the fund for ten years or more, a stock market fund is the right place for your savings because the probability of it delivering higher returns than cash is over 90%.
Even if the value of the fund is lower than the projected £7,800 in five years’ time, if you keep it in an index-tracker fund when you switch into the NPSS, the odds are very high- around 98%- that over 20-30 years your average annual return will be the long-term, inflation-adjusted average of 5% a year.
When the NPSS launches, I expect one of the options it offers savers will be a low-cost index tracker, so in 2012 you should be able to switch ‘like-for-like’.
See our Best Buy Self-Select ISAs hereA tax wheeze for Tesco shoppersFor a regular savings Self-select ISA, the FundsNetwork ‘fund supermarket’ is a good choice. There are no extra charges, you can start and stop monthly contributions whenever you want and there are no penalties for encashing. And there’s no tax on the income or the profits.
In fact, the only major difference in tax treatment between the ISA and NPSS is that you don’t get tax relief on the contributions going into the ISA. But then, you will get tax relief if you cash in the ISA and put the money into the NPSS in 2012.
How much do you need to save each month to end up with £7,800 in your ISA in 2012? Assuming a 5.3% annual return and 0.3% charges, the answer is £115 per month. If you do as I suggest and cash in your ISA in 2012, put the cash into NPSS, collect the tax rebate and end up with £10,000 invested in your pension account, then the actual net return on your £115 per month will be just over 14% a year.
Don’t believe me? Check the figures.This is a rare example of a Gordon Brown-blessed tax wheeze that works at Tesco rather than Fortnum & Mason, so don’t leave it on the shelf. Right, there you are with a sensible pension saving strategy for the next five years. Next!
Important risk warning - please readThe value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
