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Don't just get a pension: get a life plan
By Sam Barrett
Later life
The man behind retirement lifestyle website Laterlife, 58-year-old Tony Clack, is pursuing a business venture that he intends to enjoy in his retirement. After 30 years working as an IT consultant, he set up a business to focus on enjoying retirement. It covers everything from travel and health to working and dating.
Tony also runs retirement workshops for private companies and public bodies on how to adjust to this new phase of life. "It's about making the most of retirement," he says. "Doing the things you want to do, sometimes for the first time."
Don't rely on the State
Enjoying retirement to the full means getting all your finances in order. The state guarantees that everyone over 60 receives an income of at least £114.05 (£174.05 for couples) a week, with pension credit. But, as this is a meagre amount, there are calls to make saving for a pension compulsory. Whether or not this happens, relying on the state to provide you with a decent income in retirement is not wise.
Of course, pension planning is not particularly exciting. But if you start thinking of it as a means of funding a new lifestyle you'll find the challenge much easier. And whatever age you are there is plenty you can do to improve your financial position.
In your twenties
Starting to save for your retirement as early as possible will give you a head start. According to Legal & General, a 20-year-old would need to save £208 a month to have a pension income equivalent to £1,000 a month when they retire at 65. Leave their pension until they're 30, and this would increase to £325. And, at age 40, to £550.
But it's not always easy to start a pension in your twenties as there will likely be more important calls on your money.
Clearing your debt
Clearing debt as quickly as possible can also save you huge sums in interest. If you only paid the minimum 5% monthly payment on a £5,000 credit card debt with an interest rate of 21%, it would take more than 10 years to clear it and cost you a further £2,600 in interest. Doubling your monthly payment - from £250 to £500 - would clear the debt in 12 months and cost you just £544 in interest.
Moving over to a card with a lower rate of interest can also lessen the pain of repayments. For instance, paying £500 a month on a card with an APR of 10% would clear the debt in 11 months at a cost of £243. Or, if your credit rating permits, you can stop paying interest on your debt altogether by transferring your balance onto a 0% credit card.
Think about your budget. What do you need? What can you do without? Also think about what you want to do in the future - for instance, buying your first home and getting married - and put any surplus money you have into a savings account or cash individual savings account (ISA).
Free money
Pensions should not automatically be off the radar, however. Sometimes they can be too good a deal to turn down. "If your employer contributes to your pension then you should take this. It's free money," says Kevin Anderson, director of Budge and Company. Generally, you will need to make some form of contribution yourself to get your employer to match it. Anderson recommends you do this.
Salary sacrifice
As you become more established in your career you may want to consider 'salary sacrifice' - redirecting a pay rise or bonus to your pension. The benefits come from the savings on tax and national insurance. For example, after tax and national insurance, a £1,000 pay rise would be worth just £670 to a basic-rate tax payer, but it would be worth the full £1,000 if it was paid straight to their pension. Also, as the employer is saving on its national insurance contribution, it might consider adding this to the pension contribution.
"This is a very effective way to increase pension savings but there are drawbacks," warns Jerry McLoughlin, director at IFA, Punter Southall Financial Management. "Opting for a reduced salary can affect other employee benefits that are based on salary, such as life assurance and income protection."
Tapping into savings
Inheritances are relevant too. More people are now using inherited wealth to top up their pension. But even though your contributions are boosted by tax relief, don't throw everything into your pension. Look at complementary ways of saving, as they can be more tax-efficient when you take an income from them. These non-pension-based investments give you the opportunity to tap into them whenever you want, but also give you more flexibility when you take your retirement income.
Boosting your income in retirement
Go back to work Some employers are actively wooing the more mature worker, and others are inviting retired employees back on a consultancy basis.
Be your own boss Set up your own business or franchise.
Review your investment portfolio Restructure it to produce a supplementary income.
Downsize to unlock some of the equity built up in your home.
Which pension?
Pensions simplification, which came into effect in April, created one set of rules for pensions. But, although the rules on contribution limits and how you take an income from your pension are the same, there are differences between the types of pension available:
Stakeholder pension - basic and flexible pensions that give access to a range of funds within a maximum annual charge of 1.5%.
Personal pension - a wider range of fund links than stakeholders and, although there's no cap on the charges, are often priced in line with stakeholder pensions.
Self-invested personal pension (Sipp) - these offer greater investment flexibility, allowing you to put together your own portfolio of shares, funds, gilts and fixed-interest securities, and even commercial property. Charges are higher.
Company pension - these come in many different shapes and sizes but there are two basic types: the defined contribution scheme, where a set amount is paid in like a personal pension; and the defined benefit or final salary scheme, where you build up entitlement to retirement income regardless of what is paid in.
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