Personal Finance
Paralysing fears over the economy are causing many to stall on retirement planning . . . don’t be one of them
NEARLY half of UK employees are suffering a crisis of confidence over saving for retirement, research for The Mail on Sunday reveals. Analysis by actuaries Willis Towers Watson and Nottingham University, indicates that wannabe pension savers are starting out with good intentions but many are being put off by a bewildering array of options.
Increased choice, combined with economic uncertainty and conflicting financial priorities, is producing a widespread ‘pension road block’ says Willis – where people are putting off setting up a pension.
Research by insurance giant Scottish Widows, published last week, suggests the precarious state of the economy is contributing to a stalling of pension contributions.
Two thirds of savers surveyed say they will be unable to up their pension contributions next year. Scottish Widows also found savers’ optimism had dwindled following the Brexit vote – with just one in five hopeful about their retirement prospects compared with one in three before the referendum.
Starting a pension is the hardest step for most people to take, says David Smith of financial adviser Tilney Bestinvest. He says: ‘People don’t wake up one morning and say “I must buy a pension”. They need to overcome this by understanding that starting early is the key to building a pension with the minimum of pain.’
The Mail on Sunday provides top tips to beat pension paralysis.
SIGN UP TO YOUR WORKPLACE PENSION
NEW rules mean employers must now enrol most workers into a pension. Financial experts say employ- ees should not opt out if offered this opportunity to build a retirement pot. Tom McPhail, at broker Hargreaves Lansdown, says: ‘The combination of an employer contribution and Government tax breaks means the work pension is the best way to ensure you will be able to afford to retire.’
Sarah Pennells, founder of website Savvy Woman, says: ‘It is tempting to put off saving for your retirement, especially when money is tight. But before you opt out of your employer’s pension or delay starting your own, ask yourself “if I don’t do this, what will I live on when I retire?”.
‘Nothing isn’t an option – especially with the rising state pension age.’
SAVE MORE THAN THE MINIMUM
CURRENTLY, if you are autoenrolled into a work pension by your employer, you may only make a small contribution into the fund. The minimum requirement under Government rules is 2 per cent, comprising a 1 per cent contribution from your employer, a 0.8 per cent personal contribution and 0.2 per cent in tax relief. This is based on a band of earnings determined by the Government. Though some employers are more generous and the minimum auto-enrolment contribution levels are due to rise, most people should be saving far more.
Robert Cochran, of Scottish Widows, says: ‘We calculate people should save 12 per cent of their income, including any employer contribution, for a comfortable retirement. Not many are doing that.’
The internet is awash with pension calculators illustrating the contributions required to achieve a desired retirement income.
According to Scottish Widows’ survey, £25,000 is considered an ‘ideal’ retirement income by most people. Assuming someone is eligible for the full state pension of £8,100 a year, they would require a pension fund of £575,000 to achieve a retirement income at the age of 65 starting at £25,000 and rising in line with inflation. This would not pay anything to a surviving partner. If you want to buy an annuity that comes with a guarantee, you need a bigger fund.
DON’T FORGET THE TAX RELIEF BOOST
ALL pension contributions attract tax relief – currently at 20 per cent for basic rate taxpayers, 40 per cent for higher rate taxpayers and 45 per cent for top rate payers – a generous top-up to help savers reach their retirement goals faster.
It means every £100 put in a pension will cost just £80 if you are a basic rate taxpayer and £60 if you are a higher rate taxpayer. The maximum most savers can contribute, including employer cash and tax relief is £40,000 a year – there is a lower annual allowance for additional rate taxpayers.
The Government has indicated a wish to revamp pension tax relief because it is so costly. If you are a higher rate taxpayer, maximise your pension contributions while 40 per cent relief remains available.
The maximum amount you can hold in a pension without further tax charges applying is £1million.
START SMALL
EXPERTS believe it is better to start saving into a pension as early as possible, even if only small sums are squirrelled away.
Smith says: ‘Young people have serious demands on their money so are fearful of putting too much in a pension that they can’t get at until age 55 at the earliest. One answer is
to start saving a nominal amount to get things under way. Another is to save instead in a tax-free Isa because you can get at the money if necessary. Then when ready you can use the sum saved to put into a pension – and get the tax relief.’
The Government plans to introduce the Lifetime Isa next year which will provide a new flexible option for savers. It will allow savers under the age of 40 to take out an Isa and use the proceeds to buy a first home or as a retirement fund. Contributions – up to £4,000 a year – will get a 25 per cent boost from the Government.
For those who are self-employed and cannot join a works pension, Smith recommends a low-cost stakeholder pension offered by a mainstream insurer. There are no set-up charges, monthly contributions can be made from as little as £20 and annual charges are capped at 1.5 per cent.
GIVE YOURSELF A NUDGE
REVIEW your pension yearly – ensuring enough is going in, fees are not excessive and the underlying investments are a good fit.
James Devlin, a professor at Nottingham University Business School, says: ‘It may sound trite but set an annual reminder on your calendar. Try not to do it at a time of year when financial worries abound – Christmas for example.’
Your annual pension statement is a useful prompt, while Government plans to launch a pensions ‘dashboard’ should help you keep track of all your pensions by visiting just one website.
Significant life events should also prod you into reviewing your pension contributions – for example, a new job, marriage or moving home.
A PENSION PAY RISE
IF YOU are lucky enough to enjoy a pay rise or a one-off bonus, consider diverting more money into your pension. Devlin says: ‘Think about increasing your pension contribution by half the pay rise you have received. Such an approach is widely used in the US.’