Pensions and savings for retirement - by independent financial adviser John Bramwell

Introduction to
Pensions and Retirement

Does the State Pension provide enough for you?

The current (2011/12) income from the full basic State Pension for a single person is £102.15 per week, assuming a full National Insurance record. For a couple it is £163.35 per week, unless both qualify in their own right for the full single person's pension, in which case they will receive twice the single rate. Other benefits are available (such as the winter fuel payments and the second state pension) but, even with them, income in retirement is generally far below income before retirement. In some circumstances it is possible that your income requirements in retirement will exceed those before retirement. For example, if you should require long term care.

A forecast of your State Pension entitlement can be obtained by completing form BR19 from the State Pension forecasting Team, on-line at the Directgov website or by telephone (0845 3000 168).

The government intends to reform the State Pension for future pensioners. The published proposals include an option for a flat rate State Pension of around £140 a week for a single person.

How can you save for retirement?

Besides the State Pension, there are two main ways of providing extra income in retirement. Firstly, you can invest in an employer/occupational pension scheme or in a personal pension (including Stakeholder and Self-Invested Personal Pensions). Secondly, you can make investments outside a pension scheme.

Personal pensions are tax-efficient wrappers around investments such as collective funds, shares and property. Your own business premises may also be included as part of a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS).

Tax relief is given on contributions to pensions but you are restricted on when you can take benefits. Other investments are more flexible, as they can be used at any time. Hence many people use both pensions and investments to complement each other and to reduce their overall level of risk.

At retirement the whole of the pension fund is available to provide an income, typically in the form of an annuity (income for life). Alternatively, part of the fund can be taken as tax free cash, which, for personal pensions, can be 25% of the fund value.

Is now a good time to review your pension?

Retirement planning, and pensions in particular, is one of the most complex areas in financial services. Good advice should be sought when contributions to a pension are being considered.

There have been many changes to pensions over the last few years. This means that now is an excellent time to seek advice on:

Pension performance and whether the contributions are adequate.
Transferring of an existing pension to a lower charging policy. (Many personal pensions that started before 2001 have higher charges than the new stakeholder pensions.)
Consolidation of old style deferred pensions into new stakeholder pensions to reduce charges.
Checking that the projected pension fund will not exceed the proposed fund limit.
Adjustment of investment portfolio according to retirement plans and making use of tax-efficient investments.

What should you do when you are getting close to retirement?

In the last few years before retirement your investments (including your pension fund) should be reviewed and, if necessary, adjusted to meet your projected income requirements.

If surplus income is available now, then contributions to a pension could be increased or it could be suitably invested elsewhere.

How can you maximise your income from your pension
when you retire?

When you retire you can choose to purchase an annuity with your pension fund or take an income directly from the fund, using income withdrawal and phased retirement.

There are many things to consider when purchasing an annuity. To get the best value, you should not accept an annuity offer from your pension provider without seeking advice on alternatives.

The income offered to you for your pension fund can vary quite dramatically between providers. More importantly the age at which benefits are taken also has a major effect on the income you receive. The annuity rate depends on the provider's opinion on life expectancy and on future interest rates.

Therefore, transferring the fund to another provider, under what is called the 'open market option' (OMO), can maximise income.

Other considerations include:

Should the tax-free cash be taken?
Could tax-free cash be used to provide additional income?
What level of spouse's pension will you require?
Should the purchase of an annuity be delayed?
How suitable are the phased retirement and income withdrawal pension plans for you?

Do you already have a personal pension?

Since the introduction of stakeholder pensions the management charges of personal pensions have reduced for new schemes.

Some providers have automatically reduced their charges on existing schemes. Others haven’t.

The difference in the annual charges on a scheme can greatly affect the performance of your pension fund.

It may be worthwhile asking us to check if you would be better off transferring to a lower charged scheme.

Do you need other investments?

Over the past few years annuity rates have fallen and this has increased the importance of additional savings and investments to supplement pension income.

Mortality figures show that the average life expectancy of women has increased to about 85 while it is a little less for men. Hence inflation can erode the value of capital and income produced in retirement. Any selection of investments should therefore consider those that have an increased likelihood of maintaining capital and income, and which are part of a diversified portfolio to reduce the level of risk.