What should I do for retirement?

(3 Posts)
FormerlyKnownAsPrincessChick Wed 10-Apr-13 12:08:28

Pensions and investments in general can seem daunting! As Rosieres says ISAs offer similar tax benefits to pensions - no income tax or capital gains tax on investments held in either wrapper. And the big advantage is that you can access the funds before you are 55. You are limited to saving up to the max ISA allowance each tax year and this is currently £11,520 (£960 per month).

However, you must consider with pensions that the government provide generous tax relief on contributions and will top up every payment you make into your pension. This is to encourage people to save for their futures.

So, if you invest £80 into a UK registered pension, the government will top this up with £20 and your total investment will be £100 (20% tax relief). This is collected on your behalf from HMRC by the pension provider. If you are a higher rate payer, you can claim higher rate and additional rate through your tax return. The £100 contribution would effectively cost a higher rate tax payer £60 and £55 for an additional rate tax payer. You don't get these kind of reliefs in an ISA, so if you have spare money that you can lock up for your retirement, pensions aren't to be sniffed at.

You can always do a combination of the two anyway. That might be something to think about if you are nervous about not having access to the money until you reach 55. However, there is a very good reason that pensions are designed in this way and that's to ensure that you can't get your hands on the money so you have your retirement pot locked away!

There are lots of different types of pension and it really does depend what you are looking for / how much you are wanting to save / what you want to invest in as to which would be best for you.

If you are looking for something cheap and want to save small amounts you may want to look at stakeholder pensions. You can save as little as £16 on an ad hoc basis (before tax relief is added, so £20 gross) and charges are capped at government prescribed levels. At the moment a stakeholder provider can charge up to 1.5% for the first 10 years; the charge must reduce to 1% after 10 years. There are no transfer fees either. So if you were to build up a bigger pot that you wanted to move in the future or if you became unhappy with your pension provider / fund choice / charges you could move away without incurring any fees. This type of pension is flexible and cheap but bear in mind that fund choice is likely to be small. This isn't usually a problem for most people who are saving small amounts and starting their pension but it's just something to hold in mind.

If you are looking for more fund choice and have a bit more to save you may consider a personal pension. These can be more expensive than a stakeholder (not always) but are not subject to the same government prescribed limits - you may have to invest more to be eligible, there may be additional charges etc etc

If you want lots of investment choice and flexibility then you may want to look at a SIPP. However, these often cost a lot more than both stakeholders and personal pensions and can work out very very expensive for small investments. They offer lots more features and lots of flexibility but are more complicated on lots of fronts.

The annual allowance for pension savings is more than the ISA allowance. If you don't have an income you can save £2,880 a year and the government will top this up to £3,600 (tax relief of £720). Even children can use this allowance. If you do have an income (rental income doesn't count) you can save up to 100% of your earnings, subject to a cap of £50,000 (2013/2014) each year. This is due to reduce to £40,000 next year.

If in doubt seek advice, but beware, this can cost £££s. Some people find advice invaluable and like the peace of mind that having someone to guide you through offers; others see this as a costly exercise, which doesn't add much value and are disappointed by the lack of ongoing help they actually receive. I know from my line of work that a lot of people I encounter would rather sort out their own investments and pensions. If you are investing small amounts, you may be asked to pay a fee and sometimes this can be a lot because an adviser may have a minimum fee rather than a % amount of your savings (to cover report writing, administration, advice, time - small pensions are just as costly to set up as larger ones IYSWIM). You can do all of this yourself by going to a provider direct or you can use an execution only company who will sort out the paperwork for you and often secure better deals.

When you do decide to take an income (under current rules) you can take 25% of your pension as a tax free lump sum; the remainder must be used to provide an income. There are two ways to do this: buy an annuity or enter into an income drawdown arrangement. I won't waffle on about these but if you are interested, there's plenty of information out there on the web about different ways you can draw a pension.

The main considerations are:
- how much you have to save (small amounts + tax relief are better than nothing)
- whether you're happy to lock up your savings until you are 55 / decide to retire
- what kind of investments you would be happy with - think about your attitude to risk. Normally you invest in riskier investments when you are younger moving to lower risk investments as you approach retirement. This is because you have time on your side to recover any losses you incur when you are younger and because the potential for growth is greater. However, investment risk is very personal and you should only do what you are comfortable doing.
- whether you are happy to sort this out on your own or if you need some advice.

Any questions, give me shout.

HTH.

Rosieres Sat 06-Apr-13 22:38:01

I'm also in my late 30s and havn't been paying into a pension for 10 years due to time out looking after children.

I've spoken to an IFA, and as a result I have opened up a Stocks and Shares ISA to save around £300 pcm. I will be managing this myself - the costs of having the IFA were so high I wondered if this was about my pension or his! I've gone for an ISA rather than a pension fund as it will give me more flexibility over time, i.e. if we want to take money out before I am 55, if we choose not to invest it all into an annuity, etc.

In general, the sooner you can start saving the better, although it is better to clear high interest debt first (credit cards, loans, etc.). We have fortunately cleared our mortgage, so in terms of costs we don't have to worry about housing, which is a big weight off our minds.

With regards to pensions, OH is in local government and will receive a decent pension. I will receive a small amount from my 9 years of pension contributions paid in before starting a family. And we will both have the state penion, when we reach 67. So my savings are to bridge any gap between when we retire and when we qualify for the state penion, and to add a bit more to what we already have coming in.

I suppose one factor to consider is how much you think you want to live on in old age. If you can get by on a bit less then you don't have to tuck away quite as much now, so you can concentrate on other priorities now.

Anyway, if it all seems a bit much to get your head around, do go and see an IFA, even if just to get some perspective. Also, double check to see if you have any years of National Insurance Contributions. These will count towards your state pension, which you will receive around 67 years old.

JKramer Tue 26-Mar-13 22:39:05

I am in my late 30's but I do not currently have a pension of any kind.
I own a house with my partner (mortgage free) with a 60% share and have little savings.
I have looked at some pension calculators online and for me to get something decent for when I want to retire at say 65, I need to be paying in over £1000 a month and increasing every year!!!!
I have not had a pension as I was working overseas for most of the time.

Is it worth me getting a pension or is it wiser to invest in something else?
All very daunting!!!

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