I Have No Pension
For many low earners, the right thing to do is nothing. Zilch. Don’t save a penny. Why? Because if your income is low – no more than about £12,000 a year – it’s likely that whatever you scrimp and save will effectively be whipped off your state benefits when you retire.
The Financial Services Authority estimates that if you are 45 years old and save £20 a month when you come to retire at 65 the pension you receive from these savings will be just £26 a month. The brutal truth about pensions is that you have to save very large amounts every month, and for at least 20 years, to make it worthwhile.
Pay off other debts – such as credit cards – and if you have spare cash left over, put it into a cash Isa as a rainy-day fund. When you retire, apply for the means-tested pension credit which pays £130 for a single person – the basic state pension is £95.25.
The pension credit is also a passport to other benefits including housing and council tax rebates.
If you anticipate earning more in future, then it may be worth starting a personal pension plan. The chief benefit is that the money you pay into a pension is tax-free – although when you take the benefits at retirement the income it generates is liable for tax.
So where do you start? There are hundreds of different pension plans, with a mystifying range of funds and charges. Your first step should be the very useful FSA comparison tool where you can compare different stakeholder and personal pensions from a range of providers. It also shows you the charges that you’ll pay over the lifetime of the plan, which vary dramatically. For example, a 45-year-old saving £500 a month until the age of 65 will pay £20,432 in charges and deductions on a plan sold by Scottish Life, but an extraordinary £75,900 on a plan run by MGM Advantage. So-called stakeholder plans are generally cheaper than conventional pension plans.
Whatever You Put Into a Plan, the Key Points Are:
- The younger you start, the more you will end up with.
- Your money will be locked up until at least 55 – so you must be comfortable with saying goodbye to it. You might be better paying down a mortgage or loan or investing in an Isa.
- If you want to find a financial adviser try unbiased.co.uk which will link you to advisers in your area, according to search criteria you are interested in.
I Have a Ragbag of Old Pensions from Previous Employers
Consolidate them – unless your former employer offered a final salary-related scheme. In those (rare) cases it almost always makes sense to leave them alone, but make sure your contact details are up to date.
But if you’re in your 40s, it’s likely your old contributions are in group personal pension or money purchase schemes that are festering away under high charges and poor performance.
You have a choice: either consolidate the money into the pension scheme run by your new employer (although they may not accept transfers in anyway) or put them into a low-cost self invested personal pension (SIPP) instead.
SIPPs are cheap, do-it-yourself pensions with great flexibility and a huge range of investment choices. They work best for people willing to put the effort in – who understand something about investment and who are willing to track and move their money around. When you have a SIPP, you can direct your pension into individual shares, funds, bonds and even gold and commodities.
So How Do You Do It?
First, pull together your old pensions and get transfer values from your old schemes. Secondly, choose a SIPP provider. There are four major providers that don’t charge a set-up fee – Hargreaves Lansdown, Fidelity FundsNetwork, James Hay and Killik. Big pension providers such as Aegon, Standard Life and Aviva/Norwich Union all offer SIPPs that allow you to invest in hundreds of different funds.
The big names make sense if you are a medium-bracket investor. If you are in the bulge bracket – with upwards of £250,000 to transfer, specialist SIPP providers such as Dentons will tailor specialist portfolios.
Rachel Vahey, head of pensions development at Aegon, says: “Consolidating pension plans allows people to manage their money better and plan more effectively for retirement. But it also allows them to increase the buying power of their retirement fund – often larger funds can buy better value annuities, which will pay out a higher level of retirement income.
Vahey warns people to look out for penalty charges that might be incurred – but says these are now unusual. One worry is if your cash has been invested in a with-profits fund. If so, the pension company might apply a market value adjuster when giving you a transfer value, depending upon stockmarket conditions.
I Am Paying Into a Pension Scheme With My Employer
First, make sure you are in it. You generally have to pay in a minimum percentage of your salary to qualify for whatever extra the employer then pays in – and you would generally be ill-advised to forego this.
Secondly, top-up your company pension. Most new employees are put into what are called money purchase schemes. You can invest more into plans via additional voluntary contributions (AVCs), in theory up to 100% of your earnings. Many firms will boost your additional payments with matching cash for your scheme up to a set limit.
Take control of your investments. In general, you should stick to equities when younger – despite the past decade, they still outperform other assets over long periods – moving to safer havens such as bonds, property or cash in the approach to retirement. Some schemes automatically move you into less risky assets in your last decade at work.