Pension choice advice
The good news is that Britons are living longer and healthier lives. The average man born in 1950 can now expect to live to 80. if you were born in 1980 you can expect to live to 85, while boys born now will be living into the 90s. Women are even better off, living an average five years longer. So – despite doom and gloom about us all eating ourselves into morbid obesity and premature death from heart disease, we can expect a good couple of decades of life after we retire.
But it won’t be much fun if you don’t have the cash to enjoy those twilight years. Fit, active, lots of time on your hands but no cash to finance that yoga retreat or sailing holiday. Our parents and grandparents could confidently expect the Govt to provide an old age pension.
But the single person’s state pension is £3150 a year, and unlikely to increase much if at all. A crisis looms in fact. It’s the people in work, paying their taxes, who are funding the Old age pension on a yearly basis. With millions more of us retired, the sums just don’t add up. That’s why the Government is gradually raising the pension age for women. They, annoyingly for the government, live longer and thus COST more of us. Between 2010 and 2020 it will gradually rise from 60 to 65 for women. And you can confidently expect the overall pension age to rise from 65 over the next few decades.
This crisis is hitting the private pension schemes too. That’s why those generous final salary schemes, where retirees get a guaranteed amount based on the amount they were earning at retirement, have been steadily withdrawn. Annuity rates are dropping too. Pension companies look at your pension pot, work out how long you’re likely to live, based on your lifestyle, health history and where you live among other things. They then give you a yearly annuity, designed to provide you with a pension till you die, and leaving a surplus as profit for the pension company.
Obviously the later you leave your retirement, the higher your yearly pay out (as they’ll have to provide it for fewer years). But those of us retiring at 60 will, at current rates, get around 6.5% a year. In other words, a pension pot of £100,000 will provide you wish £6500, or just £125 a week to live on. Remember – this is only at today’s rates. Annuities change, and as we live longer, the rates will UNQUESTIONABLY drop.
Now your costs may well be lower in retirement. Hopefully the mortgage will be paid off. But £125 a week doesn’t buy a lot of days at the golf course or skiing holidays. And most of us won’t have anything like that amount. Gary Shaughnessy, who runs pensions for Prudential, one of the giants of the business, reckons the average pension pot in Britain is just £25,000, yielding a dismal £30 a week.
The key, as with every financial decision is to start early. Standard Life reckon that a 20-year-old who salts away 10% of his salary will end up, at retirement, with a pension of half his final salary. Start saving at 52, though, and that 10% a year will only yield a pension of around a tenth of his final salary.
We looked, a couple of weeks ago, at starting pensions for new-born children, but that’s not much use to you if you ARE 52 and woefully underpensioned. So what to do?
As far as possible, work out a budget of what you’ll need each week in retirement planning. Include new costs, such as more heating and food at home, and reduced ones. No more train fares for the commute to work for instance.
If you are lucky enough to have access to a final salary scheme (local authorities and government departments are really the last outpost of these), then grab it with both hands. You WON’T get a better deal.
If you’re in a company scheme, where the firm matches your pension contribution, ask them about raising that contribution. Remember that it’s tax efficient for both parties. Ask your boss about ‘salary sacrifice’, which allows you to cut your pay, cut their National Insurance contributions, and use the cash to boost your pension.
Find out what your maximum pension contribution can be each year (it changes as you get older) and then make it. You’ll have less money to spend, but you get tax relief on it. It makes sense.
Don’t set it and forget it. Ensure your contributions increase each year as your salary does. People always forget to do this.
Look at your state pension, and if there are National Insurance contributions missing (which will reduce your pension) top them up.
Finally – do it now. If it all seems overwhelming, a chat with a financial pensions adviser should clear things up. And remember to get a financial adviser that you pay a fee too who’ll give you pension choice advice, not one that works on commission on products sold. That way you know they’re working in your interest.!
Tags: Pension choice advice, pensions advisor, retirement planning