How to fix your pension
Follow these simple steps to take the fear and confusion out of planning your future finances
Financial worries or just looking for better value for money? Consumer champion Fergus Muirhead can help
I’M getting lots of pension questions from readers so this week I’ve put together 10 Top Tips to help you get your pension sorted.
If you have any specific pension queries drop me a line at moneydoctor@dailyrecord.co.uk
1 IT’S NEVER TOO EARLY TO START
The sooner you start to plan for retirement, the more money you will have in the pot when the time comes to retire, all other things being equal. The longer you wait before you start your planning, the more you will have to put aside over a shorter time.
2 RETIREMENT PLANNING IS NOT THE SAME AS PENSION PLANNING
While there are obvious tax advantages to pensions, it makes sense to have as wide a spread of investments as possible and that means money in the bank as cash, perhaps a share portfolio and for most people property that can be sold as part of a downsizing exercise as you get closer to stopping work.
3 JOIN YOUR EMPLOYER’S PENSION SCHEME
Most occupational pension schemes involve your employer making a contribution on your behalf. It may be structured in such a way that they will match your contributions up to a certain level – so if you pay five per cent of salary, so will they. It’s free money, don’t turn it down.
4 PENSIONS ARE VERY TAX EFFICIENT
Under current legislation you can invest 100 per cent of your salary in a pension, up to a limit of £40,000 this tax year (lower limits for higher earners), and claim tax relief on these payments. So every £10000 invested in your pension is effectively only costing you £8000 if you pay tax at 20 per cent or £6000 if you pay tax at 40 per cent. On top of that, you can take up to 25 per cent of your pension fund as a tax-free lump sum when you retire. The icing on the cake is that pension funds don’t pay much in the way of tax, so growth will be faster than in an equivalent fund outwith a pension wrapper.
5 RETIRE WHEN IT SUITS YOU
Just because you have started to take your pension doesn’t mean you have to stop work. It is possible to be taking income from one pension while still paying into another. Flexibility is the key here and it is important to make sure that your
affairs are planned in such a way that you are not shutting down your options at retirement.
6 USE YOUR PENSION TO HELP YOUR BUSINESS
It is possible, and extremely tax efficient, to use your pension fund to buy a property that you can rent back to your own business. The pension can actually borrow money to help fund the purchase and the rent that is then paid by your company to the pension fund can be used to repay the loan.
7 PENSIONS ARE NOT LONG TERM FOR THE OVER FORTIES
One of the main reasons that people put off investing in a pension is that it is seen as a long-term investment. Once you are the wrong side of 40, then you are only 15 years away from being able to start taking money out of your pension so it is no longer a long-term investment.
8 CHECK YOUR STATE PENSION ENTITLEMENT
You can complete a form BR19 and this will give you an estimate of the state pension you can expect at retirement. These forms can be found at www.gov.uk.
9 START A PENSION FOR YOUR KIDS
The limit that applies to pension contributions is 100 per cent of income up to £40,000 this year. The most that you can pay into a pension without any income is £3600 and this can be done from any age, so it is possible to start building up pension funds for your children as soon as they are born, and qualify for tax relief on payments even though they don’t pay tax.
10 A PENSION WON’T JUST HAPPEN. YOU NEED TO MAKE IT HAPPEN
People don’t plan to fail, they just fail to plan. There are tens of thousands of people in the country who are working past the date by which they would liked to have stopped work simply because they have not make adequate pension provision. Don’t let it happen to you. Take independent advice and take it early.