A comfortable retirement
Tackling the 'pensions squeeze'
With ongoing economic difficulties and increasing longevity continuing to contribute to the squeeze on pensions, recent research has suggested that almost 50% of workers over the age of 50 will need to continue working for as many as 11 years beyond the state retirement age, in order to have sufficient income to support a minimum standard of living on retirement.
You might not want to think about it now, but sooner or later being able to retire when and how you want is likely to be one of your foremost financial objectives. Achieving a comfortable retirement will take planning and implementation. 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. Remember, you could spend a third of your life in retirement, so make sure you take steps to ensure that this period is as financially secure as possible.
Planning for your retirement
As well as your age and the number of years before retirement, your planning strategy will be determined by a number of factors:
- Is there a company pension scheme?
- Are you self-employed?
- How much can you invest for retirement?
- How much state pension will you receive?
You can request a forecast of your state pension from the State Pension Forecast Service, by logging on to the Directgov website: www.direct.gov.uk
Relying on your state pension, which this year is just over £9,000 for a married couple, is an unrealistic proposition at best.
There is an overall lifetime limit on tax-advantaged pension funds of £1.5m (2012/13). There is a tax charge for fund values in excess of the 'lifetime allowance' at retirement, and for excess contributions or increases (set at £50,000 in a pension input period (PIP) ending in 2012/13).
A company pension
There are two kinds of company pension scheme, into which you and your employer may make contributions. A defined benefit scheme pays a retirement income related to the amount of your earnings, while a defined contribution 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 the early-noughties stock market downturn was one key factor that resulted in many final salary schemes being underfunded and a decision taken by many firms to close such defined benefit schemes. Many experts consider that this type of scheme will cease to exist over the next few years, as a result of the current situation. Where companies do provide company pensions these are now almost always defined contribution schemes.
Those already in company pension schemes should be aware that the rate at which personal contributions can qualify for tax relief is now limited to the greater of £3,600 and total UK relevant earnings, subject to scheme rules.
Compulsory workplace pensions
To encourage more people to save for retirement, the Government is introducing compulsory workplace pensions for eligible workers. The changes are being phased in between 2012 and 2018 (starting with larger employers).
All employers will have to enrol automatically all eligible workers into a qualifying pension scheme or NEST (National Employment Savings Trust), a simple low-cost, opt-out pension scheme that is being introduced by the Government.
There will ultimately be a minimum overall contribution rate of 8% of each employee's qualifying earnings, of which at least 3% must come from the employer. The balance is made up of employees' contributions and associated tax relief.
Private pension schemes
If you are not in a company scheme, you should make your own arrangements, since relying on the state pension is already questionable, and will become more so with each passing year.
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 more influence over how the funds are invested.
To qualify for income tax relief, investments in personal pensions are limited to the greater of £3,600 and the amount of your UK relevant earnings, but subject also to the annual allowance (£50,000 for 2012/13) in all years.
Where pension savings in any of the last three years' PIPs were less than £50,000, the 'unused relief' carries forward, but you must have been a pension scheme member during a tax year to bring forward unused relief from that year. But note that where premiums in one year are less than the annual allowance, followed by premiums exceeding the annual allowance in a later year, the unused relief carrying forward is reduced. However, under transitional rules, if 2009/10 and/or 2010/11 was a year in which contributions in excess of £50,000 were made, that excess is ignored.
Case Study 6
Andrew invested £20,000 in his pension policy in the PIP ending in 2009/10, £60,000 in the 2010/11 PIP and £20,000 in the 2011/12 PIP.
He can carry forward to 2012/13 £30,000 of unused relief from 2009/10 and £30,000 from 2011/12.
Andrew's maximum pension investment is therefore set at £110,000 for his 2012/13 PIPs.
Note that the annual allowance charge will claw back all tax relief on premiums in excess of the maximum. Where the charge exceeds £2,000, arrangements can be made for the charge to be paid by the pension trustees and recovered by adjustment to policy benefits.
Where pension savings exceed the £1.5m lifetime allowance at retirement (and fixed, primary or enhanced protection is not available) a tax charge arises:
(excess paid as annuity)
(excess paid as lump sum)
25% on excess value,
then up to 50% on annuity
55% on excess value
Premiums on personal pension policies and stakeholder pensions are payable net of basic rate tax relief at source, with any appropriate higher or additional rate relief usually being claimed via the PAYE code or self assessment Tax Return. See
Case Study 7 below for an example of this.
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?
Case Study 7
Darren will earn £60,000 in 2012/13. He will invest £12,500 into his personal pension policy. He has no other income and claims only the basic personal allowance.
Darren will pay his pension provider a premium, net of basic rate tax relief of £10,000. He is also entitled to higher rate tax relief on the gross premium, amounting to £2,500. As Darren is an employee, we can ask HMRC to give the relief through his PAYE code. Otherwise, we would claim in Darren's 2013 Tax Return. Thus the net cost to Darren of a £12,500 contribution to his pension policy is just £7,500.
Stakeholder pension policy providers are required to accept premiums of a minimum of £20 per month, although some will accept less.
There are a number of 'standards' providers must meet, including a cap on charges - for new policies of 1.5% per annum for the first ten years, then 1%. 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.
Unlike personal pension providers, most retirement annuity providers - personal pension schemes set up before July 1988 - do not offer a 'relief at source' scheme whereby they claim back tax at the basic rate.
Instead we claim the tax relief you're due through your self assessment Tax Return, or if you do not complete a Tax Return by contacting HMRC on your behalf.
Two alternative strategies
Although they might not suit everyone, there are at least two ways to make your home boost your retirement finances. The 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 an alternative approach. Equity release might not suit everyone, and you should discuss all the implications with us and your other financial advisers.
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 and investment strategies, or a combination of both, your investments will need time to grow.
Follow-up - Contact us about…
- Working out how much you need to save to secure a comfortable retirement
- 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 your savings
- Investing in stakeholder pensions
- Using your business to help fund your retirement
- Freeing capital now tied up in your home to help fund your retirement