Make it personal, make it early to get the best pension returns
A PERSONAL pension is one of the surest ways to plan for a happy retirement. Private sector provision is vital as State help is increasingly likely to become even more means restricted and fund only basic expenses.
A works-related pension is usually the first sensible way forward as the employer is likely to match your contributions. Last year £87bn was invested in company schemes and over 75 per cent of employees paid into a workplace fund.
As a result of auto-enrolment, it is encouraging that 11m people now contribute to a company scheme that previously was not offered. Yet many may not realise that the minimum two per cent contribution (which is a combined one for the individual and employer) is woefully inadequate.
It should rise to five per cent next year and to nine per cent in 2019 but often staff do not appreciate how much they are missing out by their firm’s matching sum and tax relief.
Starting a pension should not be delayed. In fact, it is even possible for a baby to commence one.
Research by Investec last October revealed that 92 per cent of under 35-year-olds worry about the long-term consequences of failing to save and, despite the demands on available cash, pension payments should form part.
Royal London, a mutual insurer, suggests that one-fifth of earnings should be squirreled away into a pension in order that you can retire on two-thirds average age at 65 years.
Part of the problem is that no provider or adviser will guarantee the eventual sum and even the term ‘pension’ is a misnomer as a contributory plan is not a regular sum paid upon retirement.
The major alternative to a pension plan is to build up a retirement pot through an Individual Savings Account (ISA) but this does not give a tax break when contributing.
Their three main strengths are flexibility and that both growth and withdrawals are taxfree.
Of course, there is also the temptation that money built up in an ISA will be taken out for another urgent need, such as to boost a mortgage for a home purchase.
Under current legislation, a pension cannot be accessed until 55 years.
The key attraction of a pension is the instant tax relief. Basic rate taxpayers obtain 20 per cent tax back. The maximum amount that can be paid in is usually equal to your salary up to £40,000 in the current tax year although the sum is lower for incomes above £150,000.
The allowance is calculated across all pension schemes where you are a member and should include employer contributions.
Above £150,000, the allowance reduces by £1 for every £2 earned above the threshold until the income reaches £200,000. At and above that level, the annual allowance is a maximum £10,000.
Check if the full limit in past years has been used as it is permitted to go back for up to three immediate tax years.
There is an overriding lifetime allowance across all private pension schemes, but which excludes state benefit entitlements, of £1m. The Government has pledged to raise the level in line with inflation for 2018/2019.
There are three types of private pension: Personal pension Stakeholder pension Self-invested personal pension (SIPP).
A personal pension allows for a wide choice of investments but no maximum fee whilst a stakeholder usually has a limited savings range but charges are capped at one per cent.
Where the saver wishes to choose more widely, if necessary with professional advice, then a SIPP is apt.
Two advantages of a SIPP, where an ‘income drawdown’ facility is created, are to allow deductions to be taken during your lifetime, even though they will be subject to tax, and for the sum remaining to be passed to your beneficiary upon death.
If you are below 76 years and have started a drawdown policy, up to £4,000 annually can be invested and gain the tax benefit.
The low returns from annuities knocked the popularity of pensions but, following the so-called pension freedoms, the restriction to purchase an annuity has gone and so the merits of saving through a pension should be seen more clearly.
When choosing where your pension money should be invested, consider the time frame (as so many do not allow enough time for a saving’s potential to work through) and attitude to risk.
Far too many are timid. Emerging markets, even if not frontier ones, should be in any retirement portfolio with a decade or more to invest.
Ask an independent financial adviser.
Even a straightforward index like the FTSE All-Share has returned around 5.8 per cent annually over a decade but some providers’ ready-made funds are returning far less.
Individual stakeholder pensions are offered by Aviva, B&CE Insurance, Forester Life, Legal & General, Royal London, Standard Life and Virgin Money. Watch for the restriction on the number of funds that can be held, such as just two with Forester Life and five with Virgin Money.
There are two basic routes when taking a personal pension where the provider makes the investment decisions for your premiums: with-profits (where volatility is reduced by massaging the returns) and unitlinked (which reflect the true underlying value).
The larger pension providers offer several options. Aviva, for instance, has four funds which it organises for less confident investors, packaged according to different levels of risk appetite.
It then has around 70 funds for the more confident investor which have been picked by its inhouse fund managers whilst for those with sufficient knowledge, it has around 2,000 funds available.
The details are not printed but available online.
On fund choice, Aegon provides over 100, Legal & General over 330, LV= 210 funds from 24 different managers, Old Mutual Wealth over 1,300, Prudential over 140 funds for its managed route, Royal London 165 of which 121 are external, Scottish Widows over 160, Standard Life 305 of which 197 are external, Wesleyan Assurance 17 and Zurich Intermediary over 3,200 from over 140 managers.
A SIPP offers a far wider range of investments including commercial property, futures, options and warrants.
According to analysis by Moneyfacts, among those offering the widest range are Alltrust, Bridgewater Pension, Carey Pensions, City Trustees, Curtis Banks, Dentons Pension, Morgan Lloyd, Pointon York, Wensley Mackay and Xafinity. Charges vary significantly. The set-up fee, for instance, is free with Aegon, Alliance Trust, Aviva, Axa Wealth, Charles Stanley, Hargreaves Lansdown, Killik, LV=, Royal London and Scottish Widows but £425 with A.J. Bell, £495 with Astute Trustee, £500 Carey Pensions and £895 Mattioli Woods.
The annual administration can also be significant such as £480 (A.J. Bell), £550 (Alltrust) and £750 (Carey pensions) but can be nil (Killik, Retirement Advantage).