Avoid the pension pitfalls...top ten tips on planning for retirement

· Visit Unbiased.co.uk to find a local IFA for help and advice on your personal finances

As low interest rates and market volatility force consumers to face the reality of their financial position, retirement planning remains a primary concern for many.  With the Tories announcing their plan to increase the state pension age and figures revealing only 23%* of final-salary pension schemes in the private sector are still open to new joiners, it’s no surprise that over a third (37%)** of all searches on Unbiased.co.uk, the professional advice website, are for advice on personal retirement planning.   

Whether you are just beginning to consider your pension planning or you’re about to retire,Unbiased.co.uk brings you ten top tips on how to plan for your retirement. 

1. Peter McGahan, Worldwide Financial Planning

“For many people, the long road to savings ends with the choice of when to take an annuity and which annuity to take. This will be the income guarantee that will provide you with your security in retirement. All too often there is little thought given to this but today the area needs very specialist advice. There are key things to consider before you decide on an annuity. For example, what will be the impact of Basel II requirements on annuity providers? This legislation could cost annuity providers a substantial amount of money and in turn drive down the rate of future annuities. Another key question relates to the impact of quantitative easing. Will it drive up inflation? If it does, interest rates will needs to rise, quantitative easing will stop and in turn gilts will probably be sold back which in turn will drive Gilt yields back up. All this will have a significant impact on pushing annuity rates up so taking an annuity today rather than deferring may well prove to be a mistake. 

“Many believe they need to automatically purchase a drawdown contract if they don’t take their annuity straight away but this is not true. You can simply leave your pension fund where it is until you are ready to take it. Furthermore you could disinvest from the stock market and invest in cash while you wait without having the need for expensive drawdown contracts.”

2. Colin Jackson, Baronworth (Investment Services) Ltd

“Although it probably flies in the face of everything we currently read about investing in property, those people who have 15 to 20 years to go before they retire should consider up-sizing even if this means buying a property that is too big for their actual needs.  Over the medium to long term, property prices have historically risen.  Buying a larger property every, say, 5 years means that when retirement approaches the property owner should end up with a very valuable property.  This can then be sold to downsize with any profit generally being tax free (as the tax regulations currently stand).  Alternatively, the home owner could enter into an equity release scheme (subject to being able to meet the requirements as to valuation, age, etc).  This would save the upheaval of a move but still release a sum of money to be invested elsewhere for retirement purposes.

“Of course, by up-sizing it means that the person will continue to have a mortgage until retirement, but some may rather pay this and enjoy the benefits of a grander home as against paying into a pension fund.  Of course, all this is based upon the way things are currently.  Nobody can tell if this Government, or any successive Government, will change the rules insofar as they relate to Stamp Duty, Capital Gains Tax liability, Community Tax or similar.”

3. Daniel Clayden, Clayden Associates

“There may be no such thing as a free lunch, but if you’re employed, there may be some free money available to help you build a bigger pension pot.  When you begin your retirement planning, you should always check if your employer offers any type of pension arrangement.  If your employer does, it is quite possible that the scheme will match any contributions that you make (up to a limit). If this is the case, it will usually be a ‘Money Purchase’ arrangement, where the level of eventual benefits will be mainly dependent on the size of the fund that has been built up at retirement – and therefore the additional ‘matched’ contributions from your employer will help you to build a bigger fund. 

“Alternatively your employer may offer one of the seemingly ever decreasing number of ‘Defined Benefit’ (otherwise known as Final Salary) schemes. This is where your employer effectively takes all of the investment risk, by providing a benefit related to pensionable salary and service completed. The cost of providing these benefits are underestimated by many, with the level of contribution required under an equivalent ‘Money Purchase’ scheme typically being as much as three times higher than those of a ‘Final Salary’ scheme member.  The real value of an occupational pension scheme is largely unappreciated by many… so make sure that you don’t miss out and take a look at what your employer offers before doing anything else.”

4. Jason Witcombe, Evolve Financial Planning

“First and foremost, get your sums right.  Work out what your total income is now, and where it might be in the coming years.  If your total income is under £43,875 for the 2009/10 tax year, you will be a basic rate taxpayer. If you think your income will always be under the higher rate threshold – always take advantage of any pension schemes though work – but if not, then consider whether there are any benefits in tying your money up and getting basic rate tax relief at outset and then paying basic rate tax on the income in retirement.  If, on the other hand, you think that your income will rise above the higher rate threshold, you may wish to consider delaying further contributions until you can get 40% tax relief. Getting 40% tax relief at outset and then only paying basic rate tax on the income in retirement is an altogether more appealing proposition.

“From April 2010, income between £100,000 and around £114,000 is effectively going to be taxed at 60%. This is because you will lose the Personal Allowance at a rate of £1 for every £2 of income over £100,000. An easy way not to pay 60% tax is to make a pension contribution. If you are in this category or think you will be soon, it’s best to start planning now.  If you are not classed as a High Income Individual but may be in the coming years, try to take advantage of 40% tax relief on pension contributions while you still can.”

5. Danny Cox, Hargreaves Lansdown

“Saving for retirement doesn’t always mean a pension.  Whilst it’s true a pension should probably form the bedrock of your retirement plans, you should not ignore the ISA.  The income from an ISA is ideal to compliment a pension: it is free from further income tax and there is no capital gains tax on the profits.  On top of this, the best ISAs can be cashed in at any time, giving you access to your capital if needed.  Those aged 50 in this tax year or over can save £10,200 into ISA a year, meaning that in April, a couple could invest £40,800 in ISA tax shelters. 

“ISA income is also important for another tax reason.  At age 65, your personal allowance increases significantly: for this tax year from £6,475 to £9,490.  This is an extra £3,015 a year you can receive before you start to pay tax.  However, if your taxable income exceeds £22,900, for every £2 of income over this limit you lose £1 of this extra age related personal allowance.  The good news is that ISA income does not count towards this means test.  In fact you’ll don’t have to record your ISA income or gains on your tax return.  For those who say that ISA limits are too small to worry about, consider if a married couple or registered civil partnership had fully invested in an ISA every year since 1999 – they would have sheltered over £160,000 from tax, plus any growth.  Had they fully used their PEP, TESSA and ISA limits every year since 1987, over £340,000 could have been invested!”

6. Robert Clarke, Almary Green Investments Ltd

“Do not bury your head in the sand when it comes to retirement planning.  Fundamentally, pensions are something consumers may wish to not think about. But if you don’t take an interest in your future, then who else will?  If you have a pension, you do not have to wait until your annual statement arrives to see what you have in your pot and more importantly, what it is likely to give you in retirement. Ask yourself the following all important questions.  When was the last time you reviewed how much you are paying in? Have your contributions kept pace with any increases in earnings you may have had? Do you fully understand what fund or funds you invest in and is the risk profile of those funds still suitable for you? Have you got old pensions sitting in poor funds with high charges? Have you considered moving away from traditional insurance company funds and explored the possibility of different types of investments? Do you know what charges are being deducted from your fund? Are your retirement plans realistic? Do you know what an open market option is? Have you kept up to date with changes in pension legislation? Do you know what state pension you will get? Yes there are many questions to ask, and if you don’t know the answers – find them out! If you have an adviser, use them. Yes advice may cost you in the short term but the best advice may save you a lot in the long term.”

7. Gordon Bowden, Quainton Hills Financial Planning Ltd

“Always consider that a single product solution is often not the best strategy when planning for retirement.  Thinking about how and when to draw benefits from a pension pot is every bit as important as the strategy for building up the pot in the first place. There are a myriad of options available including Guaranteed Annuities, Investment Backed Annuities, Phased Vesting, Income Withdrawal and Impaired Life Annuities. Each of these options have many variations. In addition the availability of a tax-free lump sum opens up tax planning opportunities. Hopefully a long and healthy retirement means that there is still scope for many individual and investment circumstances to change so it is important that flexibility to change tactics in the future is considered at the outset. For most people a single product solution is not the answer. The best strategy is often to employ a range of income generating methods that combine guarantees of certain base levels of income with additional strategies for allowing flexibility and escalating income potential.”

8. Andrew Swallow,  Swallow Financial Planning LLP

“Firstly, start your retirement planning early. If your employer has a pension scheme then join it!  Usually employers match your own payments or at least put in 3% to 6% of your earnings and this is a huge boost to your own savings.  Secondly, retire late.  Think long term – if you are in your 20’s you may well have a life expectancy into your 90’s.  When the state pension age was set at 65 life expectancy was nearer 70.  Add to this the fact that your grandparents probably started work at 16 and you may not have started work in your 20’s (after gap years and university) and you can see why you have to pay the penalty in later life!   Expect to retire in your 70’s and plan your retirement accordingly.”

9. Rob Simpson, Simpson Financial Services Limited

“Before you consider what extra steps you might take to boost your income in retirement you should find out what you are likely to receive from the state as a starting off point.  Firstly, obtain an estimate of what your state pension is likely to be by visiting www.direct.gov.uk.  It’s a free service and you should receive your personal statement within 14 days.  It will estimate how much you’ll get and, importantly, how old you need to be before it becomes payable. Then, if you are a member of your employer’s pension scheme ask them for an up to date benefit statement.  If you’re not a member of the scheme then ask for a joining pack.  If you pay into your own personal pension as well or instead then ask your pension provider to send you a new estimate.  Finally, dig out details of previous pension funds and contact the pension company to get a projection of what the fund might pay at maturity.  If you can’t find any of the paperwork and you can’t recall which company the fund was with then you can visit www.thepensionservice.gov.uk who provide a tracking service.  This is free as well.”

10. Tony Catt, Hanson Wealth Management

“Planning for retirement is all about ensuring that you have enough income to live the lifestyle you want when you stop working. Provision is not just the building of assets and savings to provide an income, but possibly more importantly making sure that your outgoings are as low as possible in retirement. This means paying off debt as far as possible, so that that there is no mortgage or any other debt payments to be made from pension income.  You should remember that the interest rate on any debt is quite likely to be higher than the interest that you will receive on deposit based savings. Other than having the use of liquid deposits, it is almost certainly better to use any excess money each month to repay your debts as soon as possible. Once this has been achieved, you can then start saving without having to worry about whether your returns are higher than the rates you are paying for your borrowing.”

ENDS

*According to National Association of Pension Funds

**According to Unbiased.co.uk Advice Driver statistics http://www.unbiased.co.uk/find-an-independent-financial-adviser/media/ifap-research/top-10-advice-needs/

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Anna Schirmer/Jennifer Comerford/ Anna Moulds, Lansons Communications, 020 7294 3682

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Notes to Editors

Unbiased.co.uk, the professional advice website

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