Until recently few dinner party topics would have brought proceedings to a premature conclusion faster than pensions; a murky world of inky fingered actuaries who somehow conjured up an income for us in retirement.
Not so the other side of the Pond; US citizens have long taken care of their retirement planning and the ‘401k/fifty-nine-and-a-half’ conversation has accompanied many a fudge brownie.
Back in Blighty, pressure on public finances, an enduring low interest economy and the demise of final salary schemes have heaped pressure on people to take more personal responsibility and the 2015 budget drove a coach and horses through the entire pension industry by removing the obligation to purchase an annuity and offering unfettered access to pension funds at age 55.
In Australia, under a similar regime, there have been stories of pensioners spending today and not giving a XXXX about tomorrow; here, fears of Saga louts queuing outside Harley Davidson and Fred Olsen have proven unfounded – there is every indication that Brits will be more circumspect, but may miss out on the lifestyle they could afford by being overly cautious.
DIY Investor is here to explore the options that are available to those seeking to either supplement their state or workplace pension, or wishing to take full control of their retirement planning.
DIY Investor delivers content from industry commentators and participants as well as practical experience from DIY investors to help you on your way; we look at how you can best accumulate funds as you build towards retirement, and how you can put your pot to work to deliver an enduring income once you get there.
What is a Pension?
A pension is a way of saving for your retirement; you make tax free contributions into your pension each month, and in return, you get a regular income once you’ve retired.
Planning for retirement is one of the key financial objectives that people face with three types of pension available – state pension, workplace pension and personal pension.
In 2017/18 the basic State Pension for a single person is £122.30, a total of £6,359.60 per year.
The full State Pension for those with 35 years of qualifying NI contributions is £159.55 per week, £8,296.60 per year.
Defined contribution (DC) and defined benefit (DB) pensions – contributions made by an employee, often matched by an employer and topped up by the government.
DC schemes deliver a retirement pot based upon the success of its investment strategy; DB schemes deliver income based upon previous salary.
An individually selected pension plan delivering returns based upon the amount and duration of contribution and the success of its investments
SIPPs – widest investment choice and freedom for the DIY investor.
What is a Personal Pension?
When you consider that you could be retired for upwards of 30 years, it’s easy to see why saving for later life is so important. But how do you get started?
Designed to provide you with an income whenever you stop working, personal pension plans are one of the most popular ways to save for retirement.
Generally used to supplement the basic state pension there are no limits placed on the amount you can set aside in a personal pension plan, and the added bonus is that you’ll receive tax relief on any contributions up to your personal allowance.
The amount you pay into a personal pension is entirely up to you – a rule of thumb is that you should aim to contribute half your age as a percentage of your salary – they are known as defined contribution pensions.
What is a Stakeholder Pension?
Stakeholder pensions are defined contribution personal pensions but with more flexibility and lower charges than standard personal pensions.
Stakeholder pensions are individual contracts between you, the member, and the pension provider – often an insurance company or an investment platform, but also a number of other providers, including banks and building societies.
They differ from normal personal pensions because their charges are usually lower and they are more flexible, although they may offer a limited choice in terms of the funds you can invest in.
The amount you pay into your stakeholder pension can be as low as £20 per month, and you can pay monthly or weekly, which may be particularly attractive to those that are self employed, not working or without certainty of income.
What is a SIPP?
A Self-Invested Personal Pension (SIPP) could be the answer for the confident DIY investor looking to take full control of their retirement planning.
First introduced in 1989, Self-Invested Personal Pensions (SIPPs) have grown in popularity are now used by over one million investors in the UK to save for their retirement. SIPPs are tax-efficient ‘wrappers’ that are put around investments to ensure they benefit from the considerable tax advantages that pension savings attract.
A wide range of investments may be held in a SIPP – from shares, unit trusts and bonds to commercial property, gold bullion and securitised derivatives – and the decision on what and when to buy, and when to sell is the investor’s to make. Successful investment choices may achieve a much bigger pension fund and retirement income than other types of pensions.
Spotlight on SIPPs
More than one million people in the UK now have a Self Invested Personal Pension (SIPP) and demand continues to grow in the wake of the 2015 pension freedoms.
Giving control over investment decisions to the individual investor and the wide range of investment options are the greatest advantages of a SIPP and with fewer private companies providing final salary pensions and state pensions under duress, individuals will increasingly be required to make provision for their own retirement.
Internet technology has been a key enabler in the rise of SIPPs as platforms have made it simple to open, run, monitor and administer a pension entirely online, making them attractive to people who are comfortable making their own investment decisions.
A SIPP could be the place to consolidate any number of occupational and personal pensions in advance of retirement to create a manageable investment vehicle from which to generate an income in retirement.
Selecting a SIPP Provider
If you decide a SIPP is the right vehicle for you, you will need to decide whether you are best served by a low cost SIPP, a full SIPP or a hybrid SIPP; even then you will find quite some variation between providers, and a little time invested up front can prevent time consuming and potentially expensive remedial action down the line.
In most cases the low cost SIPP will deliver a more than adequate platform to the DIY investor with sophisticated online tools and data available at very reasonable cost.
Since RDR online brokers have changed their pricing models, with most charging a percentage fee based upon the value of the assets held within an account; some still charge flat fees and percentage based fees can sometimes be capped, so it is important that you compare various platforms based upon your own predicted trading activity and that you ensure that you are not penalised for becoming successful.
Is a SIPP Right for me?
A SIPP will not be suitable for everyone, but they may be attractive to those investors with larger pension funds who have the confidence and ability to make their own investment decisions and fully understand the risks and consequences of making those decisions.
Remember, you are investing funds that need to provide you with an income during your retirement and making the wrong investment decisions may mean that you do not have a large enough pension fund to allow you to retire at the age you would like to or have the lifestyle you would like to have during your retirement.
Before deciding upon how you are going to manage your retirement planning it is wise to consider all of the available options.
Planning for Retirement
It is not uncommon for pensioners to spend anything up to thirty years in retirement – and that’s assuming they work until their seventh decade; all that globe-trotting, golf and white knuckle rides on the Harley will add up to a pretty penny so it is imperative that the DIY investor puts a plan in place to ensure that they don’t miss a thing.
Ensuring that your current savings rate and investment regime are sufficient to support your desired future lifestyle is a difficult and potentially daunting process and even the most ardent DIY investor may decide that this is the point at which it is worth enlisting the help of a paid financial adviser.
However, there are some considerations that may inform your decisions and help you to get your retirement plan on the straight and narrow.
Beware Pension Scams
With more and more people joining pension schemes or taking control of their pension pots under new, more flexible, pension rules, the Pension Advisory Service (PAS) has launched a campaign to raise awareness of pension scams to ensure that people are aware of very real risks of pension fraud and the consequences of transferring their savings.
HMRC estimates that £2.5 billion has been withdrawn from pension funds since April, with a study by True Potential suggesting that up to 64,000 people could have been exposed to scams yielding up to £400 million for the miscreants.
The campaign is intended to improve people’s knowledge of what a scam may look like, and also how they may be impacted in later life, should they fall victim.
Options at Retirement
Pension rules introduced on 6 April 2015 changed the pensions industry forever, freeing pensioners from the requirement to purchase an annuity with their fund and allowing them to decide when and how to take their pension.
Once they reach age 55, personal pension savers, can normally start to make withdrawals from their fund; up to 25% can be taken as a tax free lump sum, with any additional withdrawals taxed as income. This threshold will move to 57 from 2028.
There is no upper age by which retirement benefits have to be taken and therefore no requirement to take retirement benefits at all, should an investor wish to keep their pension invested.
What you do with your pension fund is a crucial decision and one that is relatively new, so with limited experience to call upon among your peer group that may be the time to take some advice to ensure that you understand your options and that your preferred option is the most appropriate for your individual circumstances.
What is an Annuity?
An annuity is a sum of money paid out in regular installments in return for the investment of a lump sum, such as a pension fund. If you have a personal pension or are a member of an occupational pension scheme, you will contribute to a pension fund over the course of your career. When you retire, the money in your pension fund needs to be turned into a regular income. An annuity is one option.
If you buy a lifetime annuity, the income will be paid for the rest of your life. If you were to die soon after buying the annuity, you would have ‘wasted’ most of your money. If, on the other hand, you lived to a 100, your annuity would still provide you with an income long after your savings might otherwise have run out. Annuities work much like insurance in this respect.
The income you will get from your annuity in your retirement will partly depend on how long the provider expects to have to pay out the income. The provider will look at your circumstances and will calculate how long people like you generally live and base its calculations on this. The longer you are likely to live, the lower your monthly income will be.