A majority of workers within ten years of retirement know their current pension and savings plans won’t give them a big enough retirement income. Here’s an action list to help you catch up.
According to the Prudential, over a third of people due to retire in 2008 say they won’t have enough to finance a comfortable lifestyle. But the Office of National Statistics did a survey recently where half of those aged between 55 and 64 said they wouldn’t have enough.
According to the Pru, over a fifth of those retiring this year will spend three months or more each year abroad, partly because this will be cheaper than living at home. And Saga say almost a third of retirees will have to move within five years of retiring to release cash to support the cost of living.
If you’re under 30, you have plenty of time to save enough to live comfortably in retirement- see my previous article on this topic. But if you’re in the 50-plus age group, you’ve got to do the best you can to catch up. Here are the steps you can take to improve your position.
Employer pension schemes
If you’re in an employer scheme, there may be options you can use to boost your pension.
Matching contributions: often the employer will put more in if you contribute more – in this case, put in the most you can that will attract additional employer contributions.
Added years: some older employer schemes still allow you to buy ‘added years’ with extra contributions - this is usually a good deal.
Additional Voluntary Contributions (AVCs): old ‘final salary’ pension schemes sometimes allow you to use money you accumulate in AVCs to fund the tax-free cash you take at retirement. This means you still get the full annual pension from the rest of the fund, so in this case, put the most you can afford into the AVC scheme.
Topping up with a personal plan
You can ‘top up’ an employer pension with your own personal plan, which can be an AVC, a stakeholder pension or a personal pension- with all of these, the tax relief benefits are the same. The fund you accumulate is usually converted into pension income by buying an annuity. You can make regular contributions and one-off payments.
The key issue is not so much the type of plan but the investments within it (see below) and the charges.
Stakeholder plans levy a flat 1.5% a year; many personal pension scheme charges are similar, but avoid any plan with significantly higher annual costs.
Top up retirement savings with an ISA
If you’re expecting a reasonable pension but still want to top up, then consider using an Individual Savings Account (ISA). You don’t get any tax relief on your contributions, but (unlike pension plans) you don’t pay any tax on your withdrawals, plus you can leave the capital to your family. The maximum you can contribute is £7,200 a year. Use a self-select ISA with a fund supermarket so you get a wide choice of investments.
Shop around at retirement
The biggest loss of pension benefits is caused by people failing to take advantage of their right to shop around for the best annuity rate when they retire. The pension plan provider is obliged to offer an annuity, but it is very unlikely to be the best deal available. You could boost your income by as much as 15% by finding the best annuity deal going. The best way to do this is to use an independent adviser.
Get the right investments
The key issue about savings is not the type of plan but the investments you own within the plan. Investment advisers usually suggest that you go for maximum returns with higher risk when you are young but move to less volatile investments as retirement approaches. This is important because when you retire, all the investments are sold to buy annuities.
If you have ten years to go to retirement, then if you can choose different investments, an ideal split would be 60% shares, 20% commercial property and 20% fixed interest. You can create this for yourself using a fund supermarket or a personal pension giving you a choice of funds, or use a ‘Balanced’ managed fund.
When you get to within five years of retirement, a Cautious Managed fund will probably be more appropriate, but check what the fund actually holds - some of these funds still have 50% or more of their money in shares and a more defensive mix of 40% shares, 20% property and 40% fixed interest would probably be more advisable.
Get the right advice
If you plan to save thousands of pounds towards your retirement over the next few years, it’s worth getting good advice. Consult an independent adviser but make it clear you want to pay a fee rather than buy plans that pay commission to the adviser.
The most important thing is to prioritise extra savings and to start contributing more as soon as you can.
