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Achieving financial security in retirement

Retirement planning
Company pensions
Private pensions
Personal pensions
SIPPs
Stakeholder pensions
Retirement annuities
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How to realise your expectations after the reduction in the value of your assets
Working out how much you need to save to create a ‘retirement pot’ capable of securing the comfortable retirement you deserve
Tax-advantaged saving for your pension
Saving in parallel to provide more readily accessible funds
Saving in company and personal pension schemes
Investing in a SIPP – for more control over where your savings are invested
Investing in stakeholder pensions for yourself and other family members
Using your business to help fund your retirement
Freeing capital now tied up in your home to help fund your retirement

For many people their retirement plans have been devastated by the fall of the stock market in 2008/09, reduction in property values and the fall in interest and annuity rates. What chance now of a 'comfortable retirement'?

Will the state pension suffice?

Even if it is not currently top of your agenda, being able to retire when and how you would like, is sooner or later likely to be one of your most important financial objectives. But achieving this goal takes planning and perseverance. Unless you are in the fortunate position of having a final-salary pension scheme which is not underfunded you will almost certainly need to augment your state pension. You could spend a third of your life in retirement. Will you find those years the golden times we all dream of, or a constant struggle to pay the bills?

Relying on your state pension, which this year is just over £8,120 for a married couple, is an unrealistic proposition at best. Currently, for a full state pension, a man needs to have made 44 years of national insurance contributions, a woman 39 years. This changes for those due to retire after April 2010, when the requirement is for 30 years contributions by both men and women to attain a full state pension.

The state retirement age is also changing with the state retirement age for women rising in stages from 60 to 65 between 2010 and 2020. This will not affect women born on or before 5 April 1950, who can still claim their state pension at 60. Women born on or after 6 April 1955 will have a state pension age of 65. The state pension age for all will then rise:

To 66 - over a two-year period from 2024
To 67 - over a two year period from 2034
To 68 - over a two-year period from 2044

Increases in the state pension were linked to the average rise in earnings among the working population until 1980 when the decision was taken to link increase to the rate of inflation. The link is to be restored in 2012, although the cost could be deferred until 2015.

According to Government estimates, the gap between how much people are saving and how much they need to save to ensure a comfortable retirement is over £57 billion. It believes that 13 million people - nearly half the working population - are not saving enough for their retirement.

Lifetime savings limits

The rules place an overall lifetime limit on tax-advantaged pension funds of £1.8 million. There is a tax charge for value in excess of the limit at retirement, and for excess contributions in a year over the annual limit, which this year is £255,000.

	2010 /11 - 2015 /16
	Tax year
Annual amount (input amount)	£255,000
Tax charge on excess	40%
Lifetime allowance	£1.8 million
Tax charge (excess paid as annuity)	25% on excess value, then up to 40% on annuity
Tax charge (paid as lump sum)	55% on excess value

Retirement planning

As well as your age, your retirement planning strategy will be determined by a number of factors:

Is there a company pension scheme?
Are you self-employed?
How old are you?
How much can you invest for retirement?
How much state pension will you receive?

For a forecast of your state pension, phone the State Pension Forecasting Team on 0845 3000 168.

You can estimate your post-retirement living expenses at roughly 60-80% of your current living expenses. Studies have shown that, comparing people aged 45-54 and those aged 65 or more, the average reduction in expenses is:

Personal care, heat and light and food	35%
Housing and furnishings	39%
Entertainment	50%
Clothing	56%
Insurance	85%
Education	88%

Company pensions

There are two kinds of company pension scheme, into which you and your employer may make contributions. A final salary scheme pays a retirement income related to the amount you are earning when you stop work, while a money purchase scheme instead reflects the amount invested and the underlying investment fund performance. In both cases, you will have access to tax free cash as well as to the actual pension.

The impact of stock market downturns including that between 2000 and 2004 and 2008 to 2009 has taken its toll on pension funds. The knock on effect of the consequential lost compounding growth during a stock market downturn coupled with lower annuity rates has resulted in many final salary schemes being underfunded leading to the decision to close them to new entrants, or even to offer alternative pension arrangements to existing members. As a consequence where companies now provide company pensions these are now almost entirely based on 'money purchase' arrangements, under which no guarantee of the eventual pension available is made.

Those already in company pension schemes should be aware that the rate at which contributions can be made by the member is now limited to the greater of £3,600 and total UK relevant earnings, subject to scheme rules. Where your employer contributes on your behalf there is no earnings related limit, and only the annual limit applies.

Private pensions

If you are not in a company scheme, you should make your own arrangements, since relying on the state pension is already unrealistic, and will become more so with each passing year.

Personal pensions

Investment in personal pensions is limited to the greater of £3,600 and the amount of your UK relevant earnings, but subject to the annual allowance (£255,000) in all years except the year in which you retire.

Case study

Phillip will earn £55,000 in 2010/11. He will invest £12,500 into his personal pension policy. He has no other income and claims only the standard personal allowance.

Phillip will write out a cheque to his pension provider of the premium, net of basic rate tax relief, £10,000. Phillip is also entitled to higher rate tax relief on the gross premium, amounting to £2,500. As Phillip is an employee, we can ask HM Revenue & Customs to give the relief through Phillip’s PAYE code. Otherwise, we would claim in Phillip’s 2011 Tax Return.

Thus the net cost to Phillip of a £12,500 contribution to his pension policy is just £7,500.

You will normally have selected one fund, or a spread of funds, for your pension savings. Would a switch give you more security or the scope for more growth?

Premiums on personal pension policies and stakeholder pensions are payable net of basic rate tax relief at source, with any appropriate higher rate relief usually being claimed via the PAYE code or self assessment Tax Return.

SIPPs

In response to poor performances from pension fund managers, some retirement savers have switched their pension savings into Self Invested Personal Pension policies (SIPPs) - a form of personal pension plan which gives the investor much more influence over how the funds are invested.

Stakeholder pensions

Stakeholder pension premiums are subject to a minimum £20 investment, and a 1% per annum ceiling on charges. Premiums of up to £3,600 before tax relief (£2,880 net) can be paid each year, regardless of earnings. Additional premiums are subject to the same rules as for personal pension policies.

Stakeholder premiums can be paid on behalf of another person - for example, by a grandparent for an infant grandchild, and are an excellent way of starting your children on a pensions savings habit.

Retirement annuities

Available only where a policy currently exists.

Your home as a source of finance?

Although they might not be suitable for everyone, there are at least two ways to use your home to boost your retirement finances. First is down-sizing - selling your current home and buying something cheaper to release value now tied up in your property for other purposes. If you wish to continue living in the same property, 'equity release' might be something to consider. Equity release will not suit all families, and you need to discuss all of the implications with us and your other financial advisers.

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Use our Savings Calculator to find out how much your savings might be in the future.

Although it’s never too late to plan for your retirement, the earlier you start, the more chance you will have to accumulate the funds you will need.

In the current climate, whether you choose to focus on pension savings, alternative savings products, or a combination of both, your savings will need time to grow.

To create a retirement fund of about £225,000 over 25 years, you would have to save about £7,000 every year, assuming approximately 2% growth. Saved in an ISA, the cost over 25 years would be £175,000, compared with £105,000 if you obtained 40% tax relief on your pension policy premiums. On the other hand, at retirement, the pension policy would provide a tax free lump sum and a modest annuity, while the funds in the ISA would be available to draw, free of tax, immediately (or they can be drawn before retirement, subject to plan rules). Partly influenced by poor returns from pension policies and adverse publicity regarding pension companies coupled with lower annuity rates, many people are now spreading their savings between company or personal pension schemes and other forms of investment.

Do contact us if you would like further help or advice on this subject.