The warning that shows why women must start saving
With 4 million hit by the great state pension betrayal...
WHEN you have to stop work to look after children or family, pension savings are a low priority in the face of everyday bills. But missing contributions in the early years can seriously harm your retirement income.
Women — who are still the most likely to shoulder caring duties — are particularly affected. Research from the Pensions Policy Institute (PPI) shows that, by her 60s, the average woman’s pension pot is only a third the size of a man’s.
More worryingly, there are 1.2 million women in their 50s now with no private pension savings at all.
Although partners can help, threequarters of women over 60 are either single, widowed or divorced when they die, according to the PPI.
And after women affected by the increase in state pension age from 60 to 66 lost their High Court battle last week, it is more important than ever to plan for the future.
The legal decision means up to four million women must continue working — or find another way to make ends meet.
One solution to plugging the gap could be the self-invested personal pension (Sipp). This allows nonworkers to reclaim basic-rate tax on pension savings up to £2,880 a year. The full allowance, topped up with tax relief, means £3,600 in total in your nest egg — essentially £720 of ‘free’ money.
‘Even if you’re not earning, your partner could pay into the Sipp and you’ll still benefit from the tax relief,’ says Maike Currie, investment director at fund manager Fidelity International.
Sipps are available from low-cost online platforms such as AJ Bell, Hargreaves Lansdown and Interactive Investor. Charges vary, but, as an example, at AJ Bell it costs 0.25 pc a year for the Sipp as well as £9.95 per share deal or typically 0.5 pc annually for a fund. Minimum investments are low, ranging from no minimum for regular saving at AJ Bell to £40 a month at Fidelity. Lump sums must be larger — at least £1,000 at AJ Bell, for example.
If you are working, perhaps parttime, you can add more than £2,880 to your Sipp each year. The maximum is 100 pc of your annual earnings capped at £40,000.
You’ll need to choose your own investments for a Sipp, as the cost of financial advice makes it prohibitive for smaller pots. Crucial to those decisions are your age and when you plan to retire, says Jason Hollands, managing director at online platform Bestinvest.
‘Those in their 20s and 30s can afford to take more risk with shares,’ he says. ‘They should spread their money between several funds which invest globally.’ His picks include Fundsmith Equity and Lindsell Train Global Equity. These have turned £10,000 invested five years ago into £26,140 and £27,120 respectively now, according to data from FE Trustnet.
At Shore Financial Planning, investment director Ben Yearsley agrees that higher-risk shares and their potential greater gain are best for long-term saving. He likes First State Global Listed Infrastructure and Baillie Gifford Global Discovery which have turned £10,000 into £19,750 and £22,490 respectively over five years. Older savers have traditionally swopped shares for less risky investments, such as bonds or property, to preserve capital needed to buy an annuity (an income for life) on retirement. But as annuity purchase is no longer compulsory, this approach is outdated, says Mr Yearsley.
‘If you’re planning to retire at 55 or 60, you may need income for the next 30 years,’ he says. ‘So you need higher-risk investments for longer.’ His selection is equity income funds which aim to grow both capital and income over time. He likes Franklin UK Equity Income and J O Hambro UK Equity Income which have made £14,510 and £13,020 respectively out of £10,000 in the past five years.
Meanwhile, Mr Hollands likes funds which balance shares with bonds and property, such as Personal Assets Trust and Ruffer. These have grown £ 10,000 to £13,510 and £11,920 respectively over the same time.
You can’t access a Sipp until the age of 55, when 25 pc of it can be taken tax-free. You can use the cash to buy an annuity, or keep it invested and take income and capital in stages — called drawdown.
A more flexible alternative is an Isa. This has a £20,000 annual allowance. Although you don’t get the tax relief upfront, all gains and income from them are tax-free.
You could consider a standard personal pension, but Mr Hollands says Sipps have several advantages. They are more portable ( future employers may be persuaded to pay contributions into them rather than starting you in a new scheme), and have a wider choice of underlying investments. But stick to mainstream investments and avoid get-richquick schemes which may be inappropriate or even fraudulent.