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Pension health check: five things to do this year

It's time to look at your pension and whether you can afford to live comfortably in retirement.

 

by Michelle McGagh on Jan 04, 2013 at 16:55

Pension health check: five things to do this year

It’s no surprise that we will have to be more self-sufficient in old age and stop relying on the state, so as 2013 begins it’s a good time to think about what you need to do to secure a comfortable retirement.

Julian Webb, head of retirement savings at Fidelity Worldwide Investment, said a pensions health check should make it to the list of New Year’s resolutions, and there are five major areas you should look at whether you are a new pension saver or already saving.

Auto-enrolment

As part of the government’s plan to get us saving more for our retirement, it launched auto-enrolment in October last year. This will see up to eight million workers put into a workplace pension scheme, although they will be able to opt-out.

Webb said for most people it would be the wrong option to opt out.

‘For most people…if you are not already part of your workplace pension scheme then it’s highly likely you will be soon and for most people staying enrolled is the best option,’ he said.

Auto-enrolment will be phased in over the next few years but Webb said those not saving should join their workplace pension earlier rather than wait to be auto-enrolled.

‘You should also consider joining your company’s pension scheme voluntarily, rather than waiting to be auto-enrolled, as you could benefit from £10,000 more in employer pension contributions over a decade.’

For someone earning £26,200 a year they could receive £15,614 in pension contribution if they contribute 2.8% of salary and the employer 6.6% over 10 years.

A person on the same salary contributing the auto-enrolment minimum of 1% for employer and employee from 2012 to 2016, and 3% from the employee and 2% from the employer in 2017, and 5% from the employee and 3% from the employer from 2018, would contribute £6,060 over a decade.

Multiple pension pots

How many pension pots do you have? Webb said if you do not know the answer to that question then you need to find out. The average person has 11 employers over their working life, and that’s a lot of pensions to keep track of.

‘You should make sure that you don’t forget about your pension pots, not matter how small,’ said Webb.

It may be worth consolidating your pension pots into one pension, although this will come at a cost; you will need to pay a professional to do this for you and may have to pay a penalty for exiting a pension scheme.

‘Consolidating your pension pots could help you keep track of your pension savings and give you more control over them,’ said Webb.

If you have lost track of your pension, which isn’t uncommon, you can track them down via this government website: www.gov.uk/find-lost-pension

How much are you contributing?

If you are contributing to a workplace pension, it is a good idea to review how much your are putting in each month – maybe you have had a pay rise but have not increased your pension contributions.

Many employers will match contributions that employees make to their workplace pension.

A 25-year-old man on average earnings of £26,200 who contributes 5% of salary into a company pension schemes, and whose employer is matching contributions, could receive an annual retirement income of £21,000 at today’s annuity rates.

Is the state pension enough?

The coalition has plans to increase the state pension to £140-a-week but this is still only roughly the equivalent of working a full-time job on the minimum wage.

Webb said a rule of thumb is that you need two-thirds of your final salary in retirement in order to live comfortably.

If you are not on track to receive that in retirement you may want to look at working for longer or working part-time.

‘You might want to consider working longer to improve your retirement income…Someone retiring at age 65 is likely to secure a better income if they keep working for an extra five years, not least because they have the chance to save more and can allow their pension pot more time to grow, but because annuity rates will improve the older people to get,’ said Webb.

If you don’t draw your state pension straight away then the level of state pension you will receive increases.

‘The £140-a-week universal state pension, if implemented by the government, will make retirement planning much easier as people will be able to work out exactly how much they need to save on top of the state pension to achieve a comfortable retirement.’

Other retirement savings

Not everyone loves pensions or the idea of locking all their money away for decades, and in real life emergencies happen and you may need access to your money.

Webb said individual savings accounts (ISAs) offer ‘an alternative way to save for your retirement alongside your pension’.

You can save £11,580 in the 2013/14 tax year into a stocks and shares ISA and any money you make you can take tax-free.

You can use your ISA to save for your retirement alongside your pensions and have access to your savings should you need it.

9 comments so far. Why not have your say?

Ian Veltman

Jan 05, 2013 at 10:04

This article illustrates the high level of obfuscation evident in the financial services industry. The system encourages young workers to pay money into schemes when they can least afford it without illustrating the real returns from the investment that would be insignificant to the financial requirements of requirement. These illustrations should not just quote the pension contributions but also illustrate the expectation i.e. P50 real rate of return on the investment and the income expected from the annuity purchased.

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Colston Hicks

Jan 05, 2013 at 19:22

Julian Webb says " For someone earning £26,200 a year they could receive

£15,614 in pension contribution if they contribute 2.8% of salary and the employer 6.6% over 10 years".

In the " Auto-enrolment " scheme there is no guarantee that there would be any of the £15,614 left for pension purchase or drawdown.

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Rose G

Jan 07, 2013 at 11:40

I have advised my children not to bother with paying into any pension fund during their lifetime as I explained to them, that governments constantly raid pension plans, the financial services gets paid for doing nothing, while your investment rarely produces what they predicted you will get if you contribute. I am now paying more in contribution to receive the same money on retirement, as well as facing more years till I can claim my state pension. Trust no government, & furthermore, the financial services which seem to believe they can get away with fraud on a massive scale because governments let them!

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Anonymous 1 needed this 'off the record'

Jan 07, 2013 at 13:59

"It may be worth consolidating your pension pots into one pension, although this will come at a cost; you will need to pay a professional to do this for you and may have to pay a penalty for exiting a pension scheme."

Surely this is where Hargreaves Lansdown comes in handy as you can transfer all pensions to them?

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Friendly IFA via mobile

Jan 07, 2013 at 15:09

Hargreaves Lansdown are a name and for that name comes a great cost!! Plenty of other companies out there with a much more client friendly charging structure. Who will work harder for you. Dont be fooled by a name!!

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John Coles

Jan 07, 2013 at 17:28

Or indeed, don't be fooled by a "Friendly IFA".

Hargreaves Lansdown offer SIPP arrangements which I only wish had been available when I was building my Pension Fund. I succeeded in accumulating a very adequate pension fund but only by ignoring the fatuous blandishments of the "Friendly IFA"-type of adviser that was on every financial street corner in those days.

Hargreaves Lansdown charges a fair rate for a good service and I am happy to have my ISA with them and pleased that my sons have opened SIPPs with them.

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john brace

Jan 08, 2013 at 10:25

Have you looked at annuity rates lately? Who would save into something where they take your money and then pay you back a fraction - taxed?

Anyone now - especially on low income- would be far better off to save in ISA's where they can access their money tax free when they need it.

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MR C.

Jan 11, 2013 at 14:47

Worryingly the above comments show a lack of correctly-informed understanding. I suspect their mis-trust of the FS industry is borne out of their own historical ignorance which they have only just realised (but will never openly admit to).

I predict that in 20 - 30 yrs time we will see millions of homeless pensioners who spent too much on holidays, new cars, iPhones, flat screen TV's, latest techno gizmo's etc when in their 30's & 40's.....and often paid for on credit, ie money they never had in the first place.

And to think that many of those 'adults' will go on to have kids. Scary!

Then many will find themselves living in semi-detached cardboard boxes and sniffing glue.

It's own stupidity will wipe out the human race long before global warming.

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Dex

Feb 16, 2013 at 19:56

I've saved responsibly all my life. I'm an average working bloke and no expert so I took the advice of the financial advisors who advised me to transfer my small merchant navy pension that guaranteed me a minimum of £5'000/year into a private pension. (it bombed and I had to fight for compensation from Watson wyatt). I took the advice of the FA who enthused about endowment mortgages (there was a substantial shortfall and I had to fight for compensation from Lloyds bank).

How can you expect people to save for retirement when they see such poor returns? £100,000 of hard earned money will buy you £5,000 per annum (assuming annuity rates of 5% and no provision for spouse or inflation) for the rest of your life. Twenty years to get your money back if you’re lucky.

An interest only mortgage of 5% for the same amount will also generate payments of £5000 per annum for the term of the mortgage.

Consider a young couple struggling to buy a home because the banks want blood & won't lend the money despite the massive amounts of cash they've received from the state.

Perhaps the government should allow us to use our pension pot to lend them the money?

They get the home they want. The government gets the tax. I get my £5000 per annum and at the end of the mortgage term my pension pot is still intact (even though I won’t be). But what do I know?

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