Olympian advice
Pension perks
Finance
Finish line focus
Grow old disgracefully
Taxing matters
Roger Black on physical and mental preparation for retirement Page 5
How luxury-loving retirees can splash their hardearned cash Page 11
Get clued up on the world of tax to avoid getting stung Page 13
October 2011
Your Pension
Distributed within the Sunday Telegraph, produced and published by Lyonsdown which takes sole responsibility for the contents
ÂŁ120 billion wiped off the value of pensions Can you afford to retire? Retiring soon? Worried about low annuity rates? Explore your options. Page 4 explains more. www.pension-drawdown.co.uk I Email: info@pension-drawdown.co.uk I Tel: 0800 03 04 008
CONSIDERING EXPLORE YOUR AN ANNUITY? OPTIONS FIRST The Pension Drawdown Company specialises in retirement advice. We can help with: 3 Maximising benefits for spouse and children 3 Self Invested Personal Pensions 3 Final salary scheme options 3 Flexible Drawdown 3 Capped Drawdown 3 Annuity Options
To find out more visit www.pension-drawdown.co.uk or call to speak to a pension specialist on 0800 03 04 008
Ask the Professor Professor Pension is here to answer all your pension questions. Below are a few examples of recent questions asked. Question. How could I benefit from transferring my civil service final salary pension? Answer. If you have a final salary pension scheme you may well benefit from reviewing it with a suitably qualified adviser to investigate all the options that are available to you. Your final salary scheme, as the name indicates, will give you a pension income that is linked to your final salary. This income is paid for the rest of your life. If you are married when you die then your surviving spouse will normally receive 50 per cent of your pension income until they die – in some circumstances, before equality laws changed, this could be a lot less. The scheme may include other guarantees or benefits which need careful consideration before any decision to transfer is made, therefore professional advice is vital. If you are advised to transfer your final salary benefits (for example, if the scheme offered you an incentive to do so and this was in your best interests), your pension is converted to a “cash equivalent transfer value”, approximately 23 times your pension income. If this was paid into a “drawdown” pensionplan,youcouldthentakeupto25percentofthefundastax-
free cash (subject to your circumstances). The rest could be invested – in line with your attitude to risk – and the plan would allow you to turn on and off the income from the fund when you wish, although the amount you take would be subject to statutory limits. Other benefits of transferring might include leaving your pension pot in its entirety to your spouse and then, subject to tax, to your children. Everyone is individual, and not all final salary schemes are the same. Transferring out of a final salary scheme may not be the best solution for you so it is important to get advice and receive recommendations in your best interest from a pension specialist. Example. Mr C works for the council. He is married and has three children. He has recently been made redundant and would like to take this opportunity to retire. His final salary pension will give him £100,000 tax-free cash and then £26,000 per year. If he dies before his wife then she will receive £13,000 a year until she dies. There are no benefits that can be left to their children. Mr C opted to take his cash equivalent transfer value of £610,000. He took 25 per cent of this – £152,500 – as tax-free cash, and invested the remainder of his fund in a drawdown plan, in line with his attitude to risk. He then initially receives an income of £26,992 per annum. When he dies, his wife will continue to receive 100 per cent of the income available from the entire pension pot rather than only 50 per cent of income if the fund hadn’t been transferred. When Mrs C dies the remaining pension pot can be left to their three children, subject to 55 per cent government recovery charge.
This is just one example of advice involving final salary schemes so it’s vital to take professional advice before making any decisions. Question. Does an income drawdown plan have to be risky? Answer. An income drawdown plan can be invested in to a number of unit trusts. These unit trusts vary in risk from international and UK equities to fixed interest bonds and property. The Pension Drawdown Company assesses its clients’ risk using a series of risk assessment questions as well as looking at their previous investment history and experience. A fund choice will be recommended that is tailored to your attitude, which can range from having a large element of fixed interest investments for the more cautious investor to a large mix of specialist equities for the more adventurous. Question. Am I entitled to an enhanced or impaired life annuity?
Talk to us to discuss options available
Answer. Many people are entitled to enhanced or impaired life annuities which may give them more income than their current pension provider offers. In fact it is estimated that 40 per cent of people could qualify for an enhanced or impaired life annuity. They are not just for the seriously ill. Smokers and people overweight can qualify too.
Ask your own question by contacting us at www.pension-drawdown.co.uk or on 0800 03 04 008
the pension drawdown company
Your Pension · October 2011
AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH
Your Pension – in this issue
Foreword
Dream or reality? With careful planning and imagination, retirement still can be a golden age By Ruth Lythe
Your Pension Publisher Bradley Scheffer brad@lyonsdown.co.uk Managing Editor Lucie Carrington lucie@lyonsdown.co.uk Editor Ruth Lythe Creative Director Martin Nolan studio@lyonsdown.co.uk Sub Editor Amy Dickson amy@lyonsdown.co.uk Journal Assistant Natalie Luketic production@lyonsdown.co.uk Project Manager Emmanuel Arthur emmanuel@lyonsdown.co.uk For more information on any of our supplements please contact us: Telephone 020 8349 4363 Email info@lyonsdown.co.uk Online www.lyonsdown.co.uk
H
ow do you dream of spending your retirement years? Perhaps you hope to embark on a world adventure, or finally get started on that novel. Maybe you’d like to move to the country, or simply spend more time with your family. Whatever your plans, retirement is the time when finally you’re free from the nine-to-five grind and can pass your golden years exactly how you please in well-earned financial security. That’s at least how we all hope it will be – but the events of the past year have shown that the age of certainty is dead and gone. In June, the government unveiled the biggest shake-up of the state pension for a generation, hiking the retirement age for men and women to 66 by 2020. Meanwhile public sector workers are being made to work longer and harder for their so-called “goldplated” final salary pensions, and those with private or workplace schemes have seen the value of their pensions plummet because of economic turmoil. In such an uncertain environment, careful planning has to be the watchword – especially for those approaching retirement in the next decade or so.
Ruth Lythe is a freelance journalist from London, she writes for the Daily Mail and The Guardian, as well as a range of other financial publications.
Sponsors Cover: Getty Images
But all is not gloom and doom. Roger Allsopp (see picture) swam the channel at 70 years old, demonstrating that retirement is the perfect time to rethink your goals. And, as this report shows, you can still achieve those cherished dreams, just with a helping hand and a little more thought.
3
30%
The uplift you can give your pension if you shop around. Ten steps to retirement p5
£120bn
The value wiped off pensions in the recent financial turmoil. Planning your pension p8
“Retirement gives you a chance to look at your life again and to open up new horizons,” says retired surgeon Roger Allsopp. In August he became the oldest man ever to swim the English Channel at 70 years and four months. It took him nearly 18 hours to cover the 21 nautical miles from Dover to northern France and the grandfather of three’s raised £100,000 for a cancer charity in the process. “When you’re retired, you have the time to become more active, both physically and in terms of contributing your community. Seize the opportunity with both hands,” Allsopp adds.
Rachael Gormley, is a freelance financial journalist based in London. She has previously written for a variety of trade magazines, worked as a reporter for newswire Dow Jones and written for The Wall Street Journal.
Scott Vincent is a journalist and editor from London, he has written and edited a number of business magazines and newspapers and has specialised in the insurance sector.
3.3m
The number of British pensioners who will be living overseas by 2050. Moving abroad p11
15%
The proportion of your salary you must save to ensure a decent pension. Pension blunders p13
Steven McKay is a freelance journalist from London, he has written for a range of publications and when not writing spends much of his time singing.
WARNING: The information provided in this report is to assist you in making an informed decision, and does not constitute a personal recommendation or advice. If you are in any doubt as to what type of product or investment funds that are appropriate to your financial needs, you should get independent advice.
4
Your Pension · October 2011
AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH
Industry view
Getty Images
A new look at retirement
Find the right retirement income plan by exploring all of your available options, from annuities to capped and flexible drawdowns Alternatives to an annuity
Annuity rates are not improving and are at an historic low. In addition, the rate set by the Government’s Actuarial Department (GAD) as reported on the HMRC website, dropped again in October to 2.75 per cent. Consequently, anybody reaching retirement now is facing a pension fund that will generate a significantly lower rate of income than the level of income that was available at any point in the last 15 years. The good news is that purchasing an annuity is no longer compulsory – there are other options – most of which still allow you to purchase an annuity at any point in the future. So if you can delay making this decision now, you could benefit if rates rise in the future. The Pension Drawdown Company specialises in advising on all retirement options ranging from annuities to capped and flexible drawdown arrangements. In some circumstances the advice given to clients has been to use drawdown-type products as an alternative to buying an immediate annuity. Most of their clients find the option of delaying an annuity purchase very attractive, especially now while annuity rates are at an all-time low. For example, capped and flexible drawdown plans could still allow you to take your maximum tax-free cash from your pension fund, leaving the remainder invested with the potential for future growth and income. There are two types of income drawdown; capped drawdown income has a maximum rate depending on age and GAD rate, whereas flexible drawdown income is
unlimited for retirees who can show they are in receipt of a guaranteed pension income from other sources totalling £20,000 a year or more. So why choose an income drawdown plan? Aside from the record-low annuity rates, if you don’t need to take an annuity straight away you may find that drawdown pensions have more flexibility. Income can
Clients’ funds are managed proactively during retirement, including regular reviews of fund choice and overall risk management be switched on and off depending on your requirements, your fund stays invested and has the potential to grow, plus the death benefit arrangements mean that you can leave the entire pot to your spouse and then, subject to a tax charge, your children.
Proactive management
With life expectancy increasing, your pension fund has to last a long time. The Pension Drawdown Company not only recommends and arranges pension plans for its clients, but clients’ funds are also managed proactively during retirement, including regular reviews of fund choice and overall risk management. Throughout past years the company ethos of buying when markets have
dropped and selling to safeguard gains as the markets rise has added significantly to the value of their clients’ pension funds. Each client’s requirements are different and their attitude towards risk will change, according to their circumstances and experiences. The Pension Drawdown Company update their clients regularly throughout the year and discuss how their funds are invested, how they have performed and recommend switching funds between the asset classes with a view to safeguard any gains, or to increase the exposure to specialist equities. The equity content of some managed funds may mean that they will have a high correlation to the markets and, with recent FTSE 100 falling by 20 per cent between June and September 2011, will lead to an inevitable drop in the value of the underlying funds. The Pension Drawdown Company often brings to the attention of potential clients, situations where the client’s pension fund has uncompetitive management charges. Not all advisers review their clients’ pensions and investments on a quarterly or monthly basis, but in many cases this is essential and so The Pension Drawdown Company ensures that clients’ pensions and investments should be regularly reviewed – as often as on a quarterly or monthly basis – and much more frequently in times of market turbulence. They believe that this is an essential part of the role of a financial adviser; setting up your pension plan is only the start of a long relationship. Some financial advisers charge
for switches made to investments, though we think this is sometimes unnecessary and a questionable way of creating revenue. The Pension Drawdown Company does not charge any clients for fund switches and therefore any recommendations to switch are in each client’s best interests. It is crucial to review all your options before selecting your retirement income method. Many people retiring receive a retirement pack from the existing pension provider and simply tick the box to accept the annuity the provider is offering – which they think is the best option – without exploring all the choices. The annuity option given to you by your current provider is not always the best available. You can shop around to see if you can get a better deal. If you use a financial adviser to help you make a choice, be aware of their charges up front – ensure that they are working in your favour for the fees you pay them. As an exclusive deal for Your Pension readers, The Pension Drawdown Company will review your retirement options with you and the initial meeting will be free of charge. Any recommendations carried out by the company hereafter will be transacted at a cost of 2 per cent of the fund value for transfer values more than £100,000 and 1 per cent for transfer values over £500,000. For a no obligation chat, call today, quoting “Oct11” on 0800 03 04 008. www.pension-drawdown.co.uk
Your Pension · October 2011
AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH
Your Pension
Ten ways to a fruitful future
5 Getty Images
Retirement may seem light years away, but it will come round much faster than you think. It’s never too soon to start planning By Scott Vincent
O
ur hard-earned retirement should mean an end to the daily toil, but without proper financial planning what could be the time of your life can prove far more stressful than the experience needs to be. The combination of soaring inflation and low interest rates means many people’s retirement income could be lower than expected if they don’t manage their finances properly. Tom McPhail, head of pensions research at financial services expert Hargreaves Lansdown, says: “Unless you are in a final
“The level of income you get in retirement depends on the decisions you make” – Tom McPhail salary pension scheme, you as the individual carry the investment risk. The level of income you get in retirement depends on the decisions you make.” With a huge array of pension products and providers out there, making the right decisions can be tricky – but it is vital if you are to enjoy the financial flexibility you want in your retirement. Here are our top ten tips of how to take charge of your financial future by preparing for retirement.
1 Sooner rather than later
Start planning – and saving – as soon as you can. There are no guarantees about future provisions of state retirement benefits and these will not be substantial enough to enjoy a productive retirement. Take advantage of your financial flexibility while still working.
2 Name the day
Your employer can no longer force you to retire at 65, meaning more people are working longer to build up their retirement pot. The average 65-year-old man can expect to live for 20 more years, and a woman of the same age can expect to live an extra 24. If your finances are not in the best shape at 65 but your health is good, it may be best to hang on for a few more years to retire.
3 Don’t take risks
The economic uncertainty of the past few years shows no signs of ending, so “de-risk” your investment portfolio. As you plan for retirement, you may need to exit more
volatile investments such as shares and move investments into bonds and gilts so you are less likely to get stung by sudden market movements.
4 Bring it all together
If you have your future retirement income spread across a number of funds, it is best to consolidate all into one place. This will give you a clearer perspective of what income you will have to play with.
5 Pick the perfect pension
There are a number of different types of pension available. The Pensions Advisory Service has a comprehensive website detailing the different types of plans on offer and also has experts on hand to help you.
6 Talk to the right people
If you’re to maximise your pension you need to get the right advice, but choosing an independent financial adviser isn’t easy. A good place to start is with friend recommendations – ask people you know about the service they received. Online directories such as unbiased.co.uk are another option.
7 Choose the best annuity
A wide range of annuity products are available. The Money Advice Service can provide you with a comparative guide to the various incomes you can expect from different pension providers.
8 Mix it up
The type of pension that is best for you will depend on your own needs, and whether you prefer flexibility or security. An annuity brings the guarantee of an income but does not allow you the same level of flexibility as drawdown plans, for example. These give you a flexible income in retirement, although you will have to have a substantial fund value for an income drawdown plan – normally a sixfigure sum.
9 Beat inflation
Rising inflation can put a major dent in your retirement funds. It is important to “inflation proof” your pension, but be warned – it can be expensive. There are various products that protect your income against inflation, but it is important to choose the right one.
10 Shop around
Seeking out the best possible rate can make a major difference to your retirement income. For inflation-proofing products alone, shopping around can add 30 per cent to your income, which you get to keep for life.
Moment of realisation: 1996 Olympic Games in Atlanta
Life after the fast lane Roger Black represented Great Britain at athletics at the highest level for 14 years, winning an array of medals. These include silver in the 400m at the 1996 Olympics, European and Commonwealth individual gold and World Championship gold as part of the 4x400m relay team. He was awarded an MBE in 1992. Since retiring from athletics he has forged a career as a motivational speaker and trainer and runs a company BackleyBlack with Olympic javelin silver medallist Steve Backley. He has also appeared as a sports pundit and took part in the second series of BBC’s Strictly Come Dancing. He is an Olympic ambassador for the 2012 London games in conjunction with insurer Scottish Widows. How does an Olympic athlete prepare for retirement? It’s something that when
you’re an athlete you try not to think about – otherwise you start to lose your edge. I think a moment of realisation for me was in 1996 when I won the silver medal at the Olympic Games in Atlanta. I stepped off the podium and thought that it was unlikely that I would be as focused again. When I retired from athletics two years later, I was no longer winning and I felt ready to go. However, retirement is hard for athletes. You have to find something else to channel your passion and energies into. What’s your advice to someone facing a lifechanging moment such as retirement? I found that it was quite scary, but you have to view it as a new chance and a new start. The same goes for other aspects of life, whether you’re starting a new business
or you’ve ended your working life. Find someone who’s been there before you and ask them to share their knowledge. Finding someone to share your experiences or join you in setting up a new project is vital. How do athletes save for a pension? During my running career, I didn’t make a lot of money – you have to invest a lot in yourself to ensure that you stay injury- free. I did have a pension with an insurer that I could access when I was 34, but I’ve since shifted my plans to Scottish Widows as I’m working with them as an ambassador for the 2012 London Olympics. However, I would say that the business that I run with Steve Backley is now my pension. It’s what I would rely on as my security in future.
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Your Pension · October 2011
AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH
Industry view
More money from your pension Get the most from your pension by exploring the open market and choosing the right annuity
Y
our pension income can mean the difference between comfortable retirement and a life of scrimping and worry. That’s why it’s odd that many people opt for a lower pension income than they could get. “Around six out of ten people preparing to claim their pensions do not use their right to shop around for an annuity, a popular financial product used to generate pension income. That’s effectively throwing money away,” says Gemma Goodman, head of The Annuity Bureau, part of Alexander Forbes. Goodman says: “The average personal pension is worth about £35,000. If you bought a car with that, you’d certainly shop around. Yet most people don’t shop around for their pension income.” Goodman cites the case of a woman aged 61 with a pension pot of £25,178.24 with her current pension provider. Once she has taken the available 25 per cent cash lump sum, Goodman: most people don’t shop around
she is left with £18,883.68 to invest in an annuity. With her current provider, that would buy an annual income of £969.06. “When we compared that with five other annuity providers on the open market, we found that her current provider offered the lowest rate. Four offered more than £1,000 and the best, offered £1,098.53 a year,” says Goodman. “That’s a difference of £129.47 per year. Women are expected to live about 20 years after Freedom to choose: shopping around can result in a more comfortable retirement
Exercise your right to shop around – it’s called taking the open market option and it could boost your pension income retirement, so that adds up to £2,589.40 – enough to pay for a cruise.” Choosing the right annuity can be particularly important if you have a health issue. This need not be a lifethreatening illness – simply being a smoker, or taking blood pressure pills, can mean you get a much higher pension income.
Other issues that can affect annuity income include your postcode, height, weight and, in some cases, previous occupation. “Everyone is assessed individually, so there is one best rate in the market for each of us,” says Goodman. So how can you avoid losing out? Exercise your right to shop around – it’s called taking the open market option. Pension companies are obliged to tell you about the open market option, but their pension paperwork typically only mentions it after the tick box where you agree to take the annuity they offer. Many people tick the box because they
think shopping around is too complicated or expensive, but it need not be. “You can use our website to get quotations from a panel of top providers, or you can speak to our advisors to discuss your options. The Annuity Bureau offers a range of services designed to help you make the most of your pension fund, and an initial discussion is free of charge. Goodman says: “Why settle for anything other than the best pension income you can get?” Tel: 0845 850 8550 www.annuitybureau.co.uk
Your Pension · October 2011
AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH
Industry view
7
Auto enrol – the new pension law for all businesses With just under 12 months left to prepare for the auto-enrolment pension time bomb, employers must act now to avoid an administrative nightmare and protect their business planning
T
he majority of UK employers are unprepared for the time bomb about to hit them in the shape of ‘auto-enrolment’ and the new obligations to provide staff pensions that this brings. Starting from October next year all UK employers will be obliged to automatically enrol all eligible employees in a pension plan (see box). But many have yet to take on board what this means for them. “More than 60 per cent of employers have not yet budgeted for the extra cost of auto-enrolment and more than 25 per cent do not know the date when the new rules will apply to them,” says Sue Curley of Capita Hartshead, which specialises in advising businesses on workplace pensions. “The biggest employers are due to start auto-enrolment first and their very size can bring with it inherent complications,” says Curley. “A retail chain, for example, will have thousands of employees, many of whom may not have joined the staff pension scheme. So to meet the new obligations, the employer will be required to identify who they must enrol, ensure that these staff are enrolled in a qualifying scheme, make contributions for them and deduct employees contributions from their pay. High levels of staff turnover in the retail sector will increase the size of this administrative challenge further.”
It does not help that some of the practical implications for employers are still unclear – despite the fact that autumn 2012 is fast approaching – leaving the first companies which have to comply just 12 months to prepare. The biggest challenge for many employers – large and small – will undoubtedly be to work out which employees fit the criteria for auto-enrolment. “Do you know how many of your employees are over 22 and earn more than £7,475 a year? It sounds straightforward, but what if the employee receives a bonus or overtime that pushes them into this bracket for just one month?
More than 60 per cent of employers have not yet budgeted for the extra cost of auto-enrolment
Are they eligible or not?” says Curley. “If they are eligible then they will not be enrolled for three months, by which time their salary could have dropped below the level required.” Curley goes on to point out that “HR departments and financial directors will be bearing the brunt of the challenge, and they may not be used to working together in this way. They have to come up with a strategy to satisfy the new rules on enrolment, which also suits the company’s aims and finances, and this may mean that a new staff pension scheme is required”. Often, the specific information that is required for auto enrolment is held on two separate systems with payroll data on one and HR information on the other and these will have to be married together to produce the necessary data. Once relevant employees have been identified they need to be enrolled in the correct scheme, which must be a qualifying one, meeting the required government standards, and one to which the employer is contributing certain amounts. Some companies may have several existing pension schemes that could qualify. “Many bigger companies have three schemes – a legacy-defined benefit plan, which may be closed but which still has members with benefits accruing; a defined contribution scheme; and a stakeholder pension plan.
You could offer any of these that qualify to employees – but there is also a fourth option – the new NEST scheme,” says Curley. NEST (National Employment Savings Trust) is a simple pension scheme for moderate to low earners set up by the government for any employer that chooses to use it. Employers’ minimum contributions are to start at 1 per cent in 2012, increase to 2 per cent from October 2016 and rise to 3 per cent from October 2017 onwards. There is a time factor to be taken into account, too. “Changing an existing pension scheme requires a consultation with members that must last a minimum of 60 days and setting up a new scheme also takes time to plan and implement,” says Curley. “The first step is to undertake a factfinding exercise in order to assess the best way forward. Specialist consultancies such as Capita Hartshead can help with this,” says Curley. “We can look at your existing schemes, plus new options such as NEST, and work out the best solution for the business and employees.” To further complicate the issue, employees are free to opt out of the qualifying pension scheme once they are enrolled, but their employer is obliged to keep a record of the fact and must automatically enrol them back in again approximately three years after the original enrolment date. Moreover, under22s and those earning less than the £7,475 threshold are entitled to ask their employers to enrol them. It could all add up to an administrative nightmare and, of course, extra financial implications for employers. Also to be taken into account is the practical cost of implementing the new scheme. There are likely to be costs for updating HR and payroll systems to meet the new demands and companies are likely to need extra staff time too, perhaps on a short-term basis, so there will be associated recruitment costs.
The basics about automatic pension enrolment From 2012 every employer must enrol into a workplace pension scheme: • those workers not already in a workplace scheme • those who work or ordinarily work in the UK under their contract • those who are over 22 and under the state retirement age • those who earn more than the minimum threshold (likely to be £7,475 a year). The starting date for the largest employers is late 2012 to early 2013, with other employers coming on board at staging dates stretching to 2016. The scheme must be a qualifying scheme, meeting government standards, and employers must contribute by law. Employees can opt out and opt back in again later. “You may be better off hiring in short- term expertise to take care of the administration for you,” says Curley. You may also need help to work out the potential cost of the new requirements based on the likely percentages of employees who will be auto-enrolled into the various pension options, and the cost of scheme implementation. “Once you know what the costs are likely to be, you can start budgeting for the big day,” says Curley. “It’s important to get started now if you are not going to be taken by surprise.” For more information, visit: www.autoenrol.capitahartshead.co.uk
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Your Pension· October 2011
AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH
Your Pension
Life... but not as we planned it Even the most carefully prepared retirement plans can be set awry by surprise events. It’s important to shore up your finances against life’s twists and turns By Steven McKay
T
he economic turbulence of the past three years has dealt brutal blows to the finances of many soon-to-be retirees. You may have seen the value of your pension pot plummet after successive financial crises, or perhaps your hard-earned savings are languishing in a bank account earning almost no interest and being eaten away by rampant inflation. But it’s not just the economy that can play havoc with financial plans. Changes in personal circumstances, such as marriage, divorce and altered employment status, can have a significant impact as well. However, a little forethought and some preparation will allow you to feel the benefits and mitigate any blows life’s dramas might deal to your pension pot. As a starting point, it’s absolutely vital to make frequent assessments of how much you have stashed away for your retirement. John Richardson, head of advice policy at consultancy Towry, says: “Most people have a number of different parts of their pension
Better, by definition Alan Cooper is reaping the financial rewards of opting into a definedcontribution pension scheme Alan Cooper’s final salary pension scheme is helping him live the retired life he’d always wanted – but he believes that younger generations will not have it so good. The 65-year-old retired from his role as a consultant at a major computer company this year. His increasingly rare definedcontribution scheme that he has saved into for 30 years means that the jump from working life to retirement hasn’t been financially dramatic. In fact, it has allowed him to get more involved in his passions of music and walking. Cooper, from Tyneside, says: “I was always aware that people a few years younger than me at work were not getting the benefit of a defined-benefit scheme and that seemed to be a matter of concern for them. If people have the option to get into one of these schemes, they should seize it.”
in a variety of funds. Go through them all to find out where they are, what they are and how much they are worth. “It might be a good idea to think about consolidating them – but take professional advice on whether this is right for you.”
Joint decisions
According to Nigel Barlow, director at retirement specialist Partnership, couples need to consider how they want to use their pension funds about a decade before they are due to retire. “It may sound gloomy, but you both should also try to work out what will happen if one of you dies,” he says. “If you have individual pensions, will these be enough to live on? The state pension will only work out at about £7,500 a year, so you will need to have income from other sources.” In retirement, you get a more generous personal tax allowance – the first £9,490 of your income is tax-free once you pass the age of 65 – and it makes sense for a couple to split their retirement funding between them to make full use of this. Both partners should consider whether they want to buy an annuity and if so, what kind. A joint life annuity will provide a guaranteed income for the surviving partner when the other dies, for example. Taking the time to shop around for an annuity is well worth it, too. Research from the Pensions Income Choice Association and Oxford Economics found that shopping around can boost your annuity rate by an average of 20 per cent. In addition, it found that 40 per cent of people also qualified for more money because of health reasons they hadn’t previously disclosed. Yet, bizarrely, only one in three people ever bother to take anything other than the annuity their pension provider offers them and retirement specialist Partnership believes that about £7 billion has been lost in this way over the past ten years. It definitely pays to do your homework – if you are considering an annuity, visit the government-backed Money Advice Service for impartial advice and comparisons. Alternatively, if you have a guaranteed income of £20,000 a year, you may want to consider a flexible drawdown plan, which will allow you to withdraw cash when you need it and makes it easier to pass money to your heirs through a pension.
Separate interests
There are about 150,000 divorces in the UK each year and, while the personal impact of a break-up is huge, the consequences for the
couple’s pension funds can also be dramatic. How any pensions are divided should be decided as part of the settlement and one partner may find they lose a significant part of their fund. It may be the last thing on your mind during a divorce, but it’s important to act to ensure your finances recover as rapidly as possible. If you’ve had to make a payout, you need to start saving to make up the difference. But if you think you might need to access the extra cash at any time, consider saving into an ISA or similar account so it’s not locked away.
Finding the best deal Dr Parviz Seyedi shopped around for the best annuity for both himself and his family Dr Parviz Seyedi made sure he shopped around to get the best annuity possible to suit his and his family’s future needs. Although still working as a private doctor in Egham, Surrey, the 69-year-old has recently cashed in the pension pot he built over several decades and bought an annuity through broker Partnership. The annuity is guaranteed to rise with inflation and to provide an income for his wife should he die after receiving it. “It’s reassuring for me to know that there is an added layer of support there, should anything happen,” he says.
Statistics show that women are more likely to have a smaller pension than men and, after a divorce, the small sum they have saved for retirement can diminish further. Partnership’s Nigel Barlow recommends that women in this situation should make sure they build up their pension pots in the most efficient way possible, such as joining a scheme run by your employer or increasing your contributions if you’re already in a scheme. “If you’re due to retire in ten years’ time, with your employer’s contribution as well as your own, you may be able to build up a pot Paulwill Askew Claire Lara says. with Wirral that helpand you,” Barlow By building Festival organiser Pimbley up a pension pot ofAndrew £100,000, for example, you could guarantee yourself an income of £7,500 a year. If you’ve received a payout from a former partner’s fund, you should carefully consider where to put this cash, making sure you take professional advice on whether you should leave it in your former partner’s existing scheme or stash it elsewhere, to ensure you get the best return in the future.
Going solo
Many self-employed people argue that their
Your Pension · October 2011
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Your Pension
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In a pickle They’re the “sandwich generation” – caught between helping their children and funding the care of elderly relatives. We look at the financial dilemmas facing many baby boomers By Rachael Gormley
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Cost of living
For those who want to take more control of their pension pot, a self-invested personal pension (SIPP) may be the answer. This can also come in handy if you want to buy your own business premises, as using the SIPP to fund the purchase will give you a number of tax advantages. However, take professional advice before going down this route.
Safe havens
business is their pension and plan to work on much later than the usual retirement age. There is no guarantee, however, that they will be able to do this. If you decide to become self-employed, you’ll miss out on the extra contributions you would have received through your employer through a workplace pension scheme. You may be paying lower National Insurance contributions (NICs) than employees, though – the self-employed pay eight per cent in NICs, while employees pay 11 per cent.
The recent financial turmoil has wiped £120 billion off the value of pensions, according to figures from the National Association of Pension Funds. The worst affected are those approaching retirement who had not opted to protect their savings by switching into safer assets. If your retirement is still some time in the future, though, there is time to make losses back. It’s also wise to take some steps to ensure that if a similar crisis strikes again, your pension pot won’t be badly affected. Most funds will give you the option to shift your funds into less risky assets, such as cash and bonds, as you near retirement. For more sophisticated savers, enlisting the help of an investment manager will allow you to discuss in detail where to put your assets.
Inflation is a serious issue for pensioners – they’re more likely to be affected by rising costs as they spend more of their income on the goods and services that are subject to the highest rates of inflation, such as food and fuel. This phenomenon is known as “Silver RPI”. Research by Age UK recently found that Silver RPI has averaged 4.6 per cent a year since January 2008. That’s almost 50 per cent higher than the 3.1 per cent average annual inflation recorded by the Retail Prices Index (RPI) over the same period. Against that backdrop, pensioners’ incomes buy a lot less than they used to. It can be especially difficult for people who bought a fixed-rate annuity. Recent figures from insurer Prudential show that the average person retiring in 2011 expects an annual income of £16,600, but if their income remains fixed, it will be worth a mere £6,700 in today’s money in 20 years’ time. Vince Smith Hughes, head of business development at Prudential, says: “Pensioners on a fixed income are particularly vulnerable when it comes to rising living costs and our figures demonstrate the true extent to which Silver RPI impacts on the spending power of those in retirement. “There are alternatives to a fixed income in retirement, for example, choosing a flexible income plan that has the potential to grow could help many retirees to mitigate the effects of increasing living costs. We recommend that people approaching retirement seek professional financial advice to help them understand all the retirement income options open them.”
t’s a time of life when you might expect to be better off. Many baby boomers have paid off their mortgages and gained membership to now-elusive final salary pension schemes. But the sandwich generation are increasingly feeling financially stretched as they help their children through a tough housing market, while also funding costly nursing care for elderly loved ones. “Those in their 60s are often supporting themselves, their own parents and sometimes also helping their children and even grandchildren,” says Dr Ros Altmann, director general of over-50s group Saga. One financial option is to use an income drawdown plan which allows individuals to take money from their pension fund while the fund continues to be invested. Thanks to new Treasury rules, people who will receive a secure pension income of at least £20,000 a year and have finished saving for their pensions are now able to withdraw as little or as much income from their pension fund as they wish, but get professional advice. For homeowners, equity release could be an option. Unlocking capital trapped in the bricks means baby boomers can continue to live in their home and receive a lump sum or a steady income. Planning for care is a priority for all as costs continue to rise. “Later life income needs are about more than pensions,” says Altmann. One option may be to take advantage of the tax-free ISA allowance and set aside two years’ allowance for a care “nest egg”.
A helping hand Releasing some pension cash allowed one father to help his son lay the foundations for a secure financial future When 56-year-old John Brown from Manchester decided to give his son a deposit for his first flat, he considered several ways to raise the cash. Flexible retirement options such as income drawdown weren’t available on the several pension schemes in which he had invested, so instead he consolidated his plans into a self-invested personal pension, or SIPP. This allowed him to take 25 per cent of the total as a tax-free cash lump sum. Brown says he made the decision as he feels he has time to build up his pension again before retirement. And he was delighted to be able to give his son the deposit, helping him gain a foothold on the property ladder.
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Your Pension · October 2011
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Industry view
Eco-friendly investment Flexible and stable timber investment that comes with a clear conscience
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f you require an investment that offers good returns, stability and security, then Ethical Forestry’s timber investments deserve your consideration. A typical forestry investment of £18,000 over 12 years projects returns of £104,189. The investments pay out in regular intervals, making them ideal for mid to long-term financial planning. Ethical Forestry also tailors investments to suit an individual’s budget, making them flexible. Many investors are taking advantage of this opportunity for saving plans, family trust funds and personal pensions. The investments are HMRC compliant and SIPP approved, so your IFA can simply transfer an existing SIPP pension, or start a new one, making investing a simple process. Investing in forestry (and ultimately timber) for profit is not a new concept. Financial institutions, hedge fund managers and trusts have invested in timber for years and produced consistent long-term profits for themselves. They are popular with investors as they offer steady, stable increases with predictably high returns and, as they are not correlated to the stock market, they do not suffer from unpredictable peaks and troughs. Ethical Forestry has made this lucrative investment available to everyone, allowing small
cap investors to benefit from this unique proposition. A strong, influential factor in deciding whether to invest in timber is the continuing rise in demand, which is projected to rise in line with the growth of the global population; as much as 55.88 per cent (UN) by 2050.
A strong, influential factor in deciding whether to invest in timber is the continuing rise in demand, which is projected to rise in line with the growth of the global population Developing countries such as China, India and Russia are unrelenting in their requirements for timber for construction and energy wood. This is driving illegal forestry operations worldwide to cope with the demand, all with devastating effect. Combine this new appetite for timber with the existing and projected global demand, and it is easy to understand why the rainforests continue to be felled at a rate of 13 million hectares per annum – the equivalent of one football pitch every second.
To help relieve this pressure on the natural supply chain, Ethical Forestry has created sustainable plantations, which offer an alternative, ecologically friendly supply source. Matthew Pickard, Ethical Forestry’s MD says: “Our plantations are run on a ‘for profit’ basis, clearly focused on producing a good ROI for investors. Investor security is of paramount importance to us, for this reason we own all of our plantations outright and have our own onsite management teams caring for them on a daily basis. No third parties are involved with our operations that you can’t keep your eye on. This way, we can ensure that all our trees are well maintained and protected, creating investor security thus making us unique within the market place.” “We know that investing for profit and having a clear conscience are important considerations for investors. For every plantation that Ethical Forestry buy, we also purchase existing wild forests and place them within our forestry easement trust. This easement trust preserves these valuable forests, forever protecting them and the wildlife within them that can be so easily lost,” says Pickard. For more information about Ethical Forestry, call 0800 0753010 or visit www.ethicalforestry.com
Your Pension · October 2011
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Your Pension
The emigration game Thousands of pensioners leave the UK every year to spend their retirement overseas. But to live the expat dream you need to plan ahead By Scott Vincent
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n increasing number of Britons are looking to spend their retirement years on foreign shores, with the thought of sun, sea and sand enticing many to move abroad when they finish their working life. More than 3.3m British pensioners will be living overseas by 2050, according to the Institute for Public Policy Research, and the trend looks set to continue. High property prices in the UK and the appeal of a better quality of life elsewhere are among the factors causing people to look further afield when planning their post-work lifestyle. And even though according to a recent survey by currency services provider MoneyCorp, 50 per cent of pensioners living abroad say that their income has dropped since the economic downturn, nine out of ten has every intention of remaining overseas. As with all other aspects of your retirement, seeking financial advice is an important first step to avoid potential pitfalls when you’re moving abroad. The first port of call should be HM Revenue and Customs, which will be able to give you important advice about your tax residency status and tax liability in the UK, as well as notifying you of any tax refund you may be due. Your tax liability in your new country of residence will also be an important consideration, and it is worth investigating
Moving on: more than 3.3million UK pensioners will be living abroad by 2050
this before you make any firm decisions about a move. The Citizens Advice Bureau has a list of specialist tax advisers so you can find a local expert. It may be worth considering the benefits of offshore banking, too, which can reduce your tax liability if you live in certain countries. Depending on the type of pension you have, you will normally be able to arrange to have your pension paid overseas, but it is important to be aware of the risks involved. If you move to another country but your pension is still paid in sterling, currency movements could work against you. Similarly, be careful that the government of the country you retire to inflation-proofs your state pension. Some, particularly certain Commonwealth countries such as Canada, New Zealand and Australia, will
not do this and UK pensioners risk seeing their income being whittled away by soaring inflation. It is important to seek independent financial advice before you go to ensure your retirement income is protected when you are enjoying your new life abroad. It’s also absolutely vital to consider the healthcare costs of the country to which you want to move. While you may be eligible for treatment in countries with an agreement with the UK, it might also pay to take out private health insurance. You’ll need somewhere to live, too. Buying property abroad is a major challenge and thorough research is needed to avoid any mistakes. Engage with an independent local lawyer and ensure you are fully aware of all property laws in the country you are moving to.
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A new life down under With careful financial planning, Lori Hope is living the dream in New Zealand Lori Hope, 65, hasn’t looked back since switching Newcastle upon Tyne for Auckland more than a decade ago. She left the UK as part of an “awfully big adventure” after hitting her 50s, heading to join friends in New Zealand. Since then she has been joined by her children and other relatives and, while she is semi-retired, she also runs her own hair and beauty business. “My original plan was to come here for two years, but I’ve stayed. New Zealand is a wonderful country, with fabulous weather and people – I love it here,” she says. While British retirees are welcome in New Zealand, Hope warns that without careful financial planning you could run into trouble. “The UK state pension here is frozen but it’s actually currency fluctuations and not inflation that you have to worry about. If you had nothing but the state pension to rely on, you could run into trouble out here,” she says. Later, if you should decide to return to the UK, you will need to ensure you contact your local tax officials and HM Revenue and Customs again before you come back to make sure you are paying the correct level of tax. The Pension Service will also be able to help to ensure you don’t count the cost of your move.
Earn it – then spend it! Today’s retirees are fitter, healthier and more active than any generation before, and increasing numbers are financially secure enough to make their wishes come true By Rachael Gormley
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he generation of baby boomers born between 1945 and 1960 has given the word “retirement” a new meaning. For many of these recent and soon-to-be pensioners, pottering in the garden and pinching the pennies is simply unthinkable – thanks in part to generous pension schemes and soaring life expectancy. The phenomenon is known as SKIing, or Spending the Kids’ Inheritance. The name, of course, is a little tongue in cheek, but for many of this generation a childhood spent in the austerity years of post-war Britain has made them more appreciative of luxury and keen to have their share. And it seems that these expensive tastes have not met with disapproval from the younger generation – not yet at least. In fact,
a recent survey from insurer Aviva found that about three-quarters of young people are happy for their parents to unlock the cash in their home in order to spend it on a more enjoyable retirement. So with their working days over, the only things SKIers need to pencil into their diaries are ways to enjoy growing old (dis)gracefully. Here’s our guide to how to spend it:
Machu Picchu and safaris in South Africa. Some trips never go out of fashion. A trip on the luxury Venice Simplon-Orient Express from London to Venice in opulent style remains a dream for many saving hard for their work-free life. A two- day trip in a suite cabin will set you back a cool £2,670. Visit: www.orient-express.com
The great escape
Combining the dream of travel with a love of classic motors is a sure-fire antidote to the dreary commute of a retiree’s working life. If you’re lucky, maybe your former colleagues will treat you to a retirement gift of a driving experience in a Jaguar E Type. Prices start at £275 for 24 hours from Great Escape Cars. For the more adventurous, riding the open highways of the US would surely impress the grandchildren no end. The EagleRider escorted motorcycle tour from company
After so many long evenings trapped at work over the years, it’s no surprise that a holiday of a lifetime is often on the top of new retirees’ to-do lists. With many pensioners fitter than ever, holidays are more likely to involve kayaking in Lake Malawi than minding the grandchildren. Holiday companies specialising in the over-50s market report rising numbers exploring the Incan treasures of Peru at
Easy rider
Jet set: retirees are SKI-ing their way abroad
Bon Voyage takes on the original Route 66, a 2,400-mile stretch from Chicago to Los Angeles and lasts 14 nights. It will set SKIers back about £3,495 each based on two riders sharing a classic Harley-Davidson and a room. Visit: www.greatescapecars.co.uk
On the road
Caravanning may have the connotations of old-school retirement, but today’s luxury caravans are perfect for glamorous SKIers. Stealth Caravans’ flagship Defiant X63 model comes with a power shower, a glossy chrome-fitted kitchen and room for six – all for £20,355. And with room for the family, too, spending the kids’ inheritance might go down a little sweeter with the offspring. Visit www.stealthcaravans.co.uk
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Your Pension · October 2011
AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH
Industry view
Taking control of your investment
Use your loaf to get jam today
Find the right retirement income with a flexible and easy-to-manage self invested personal pension
Alter the belief that pensions are boring and risky – choose the right investment now to ensure retirement is something you can look forward to
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he issue with “off-the-peg” pensions is that we don’t lead “offthe-peg” lives. Our income, needs and aspirations are unique and fluid, but a conventional personal pension product can’t hope to reflect this. That’s one reason why more than half a million Britons have opted for SIPPs (selfinvested personal pensions). Instead of buying a tiny share in a gigantic fund, a SIPP gives the owner, or their agent, full control over how their money is invested. The tax advantages are the same and investors can move funds between SIPPs and conventional funds. “There’s a misconception that SIPPs are only for the rich,” says Georgina Mitchell, head of investment services at investment management specialist Redmayne-Bentley. “But that’s not true: there are products for any level of investment.” SIPP trustees such as Sippdealxtra offer low-cost SIPP products that can handle anything that can be bought or sold on the stock market – stocks and shares, AIM investments, government bonds, even hedge funds. “The key advantages of SIPPs are control, flexibility and transparency,” says Mitchell. The owner has full control over the investment strategy, so could start with higher-risk, higher-growth investments in their 30s, then could protect their gains in their 50s by switching to government bonds and buying high-yield stocks to provide an income during retirement. An owner has flexibility to contribute whatever and whenever they like, subject to
the statutory maximum contribution limits, says Mitchell. And when they retire they can usually take up to 25 per cent of the fund as a tax-free lump sum and choose whether to take income from the remainder or use some or all of it to buy an annuity. Investment management firms may offer three levels of service: execution-only, advisory and discretionary. But even with a discretionary service, where the firm makes investment decisions on your behalf, your needs are uppermost. At Redmayne-Bentley each client has a dedicated investment
The client’s needs are uppermost, and at RedmayneBentley each has a dedicated investment manager manager and their fund is formally reviewed every six months, although managed on a day-to-day basis. Most investors use the services of an IFA, a SIPP trustee and an investment management firm or stockbroker. “Each is paid separately, giving investors great transparency over whom they are paying and what they get for it”, says Mitchell. “Nor are SIPPs necessarily more expensive than conventional pension funds”, she adds. “They’re an option that every pension investor should definitely consider.”
P
ensions are commonly sold as jam tomorrow. However, as John White from RSM Tenon points out, a pension is jam today. “Many people don’t realise that a pension is one of the most tax-efficient savings options,” says White, Head of RSM Tenon’s financial management division, which provides independent retirement planning advice. He points out that a pension allows contributors to invest a chunk of their wages – tax free – into a trust. “Not only that,” says White, “but the future returns will be largely free of income tax and capital gains tax, and can be passed down to your spouse and children free of inheritance tax if you die before age 75. “With the tax man throwing in between 25 per cent and 100 per cent on top of your net investment, you are already streets ahead of most other investment options even before
future growth is taken into account.” So why are many people resistant to investing in pensions? White blames a lack of understanding. “Pensions are often seen as boring and complex, and headlines about
Golden years: opportunities are there to invest
www.rsmtenon.com
The price of investments and the income paid on them can fall as well as rise. All investments involve risk and you may not get back the full amount of your investment and it may fall altogether. www.redmayne.co.uk/sipps
“Many people don’t realise that a pension is one of the most tax-efficient savings options” – John White wildly fluctuating fund values and increased costs of living longer don’t help,” he says. Instead, he points to the interesting range of investment options that pensions offer. “Through a pension you can invest in almost anything, from cash to gold to shares in global businesses and infrastructure, so there is something for everyone, whatever their appetite for investment risk,” he says. He dismisses as untrue the beliefs that pensions are too risky, that you can be too old or too young to invest, that you are forced to buy an annuity, or that you lose your pension if you die. “While there are issues to consider in more detail, a pension should be a part of everyone’s savings and investments,” says White. “With careful planning, a pension can make retirement something to look forward to – and the tax breaks make a pension jam today as well as jam tomorrow.”
Your new “flexible friend” There is an increasing trend of using a pension for financial planning as more people look to move gradually into retirement through part-time working
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he slogan may be familiar to the early adopters of Access credit cards some 30-plus years ago, but according to Jamie SmithThompson, MD of pension specialists Portal Financial, these days it can be applied much more comfortably to flexible income drawdown plans. “Many of our clients are choosing to switch to part-time work and ease themselves into semi-retirement. Income drawdown allows them to do this by simultaneously topping up their salary and Smith-Thompson: many clients have old pensions
giving their pension fund the potential to grow further,” he says. With income drawdown you can start to access your fund from 55, taking as little or as much as you need – within the limits of the plan – without having to commit to buying an annuity. So, for example, you were considering working three days per week, earning £20,000 a year, and you wanted to top this up to £30,000 a year. You could use income drawdown to draw the additional £10,000 from your £250,000 pension fund. If your fund grew at a very achievable 5 per cent then, even though you were taking an income, it would have grown further to £261,000 after five years. “This is a very attractive option for those who aren’t ready to retire completely but do want to slow down a
little and enjoy life, preferably maintaining a high enough income to allow them to have some fun,” says Smith-Thompson. Using income drawdown to clear any outstanding debts before retirement is also proving popular, and can be an intelligent
Using income drawdown to clear any outstanding debts before retirement is also proving popular, and can be an intelligent decision decision. “It makes no sense paying more in interest on your debt than you are gaining from your savings,” he says. “Using the tax-free cash option to clear
this immediately means you can be debt-free now and use the payments to increase your pension fund again rather than wasting your money on interest charges. Plus, of course, you will receive tax relief on the pension payments, giving you an immediate gain.” “Many clients have old pensions that they no longer pay into and that aren’t performing. You can combine these into one pension, take the tax-free cash that is needed, and concentrate on growing the new pension strongly to be in a much better position than before,” says Smith-Thompson. Just as retirement itself has become a more flexible proposition for many, there are equally flexible products now available to help manage your financial situation. www.portalfinancing.co.uk
Your Pension · October 2011
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Don’t count the cost Ignore the world of pensions and tax and you risk missing out on some pleasant surprises and being hit with a few nasty shocks By Rachael Gormley
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or many people, a spot of swotting up on the world of pensions and tax is the perfect cure for insomnia, but you could be left counting the cost if you don’t do your homework. Even in today’s difficult economic environment, contributing to a pension should open the doors to a number of tax perks, as the government seeks to shift the cost of Britain’s ageing population away from the state and on to the individual. You can save as much as you like into any number and type of registered pension schemes and get tax relief up to an annual personal allowance on contributions of up to 100 per cent of your earnings each year. That’s as long as you pay your contribution before the age of 75. The government has recently pushed down the upper limit of the personal allowance from £255,000 in 2010 to 2011 to just £50,000 this year, but tax experts agree that this is still pretty generous. In fact, the vast majority of people are unlikely to put away £50,000 in a lifetime, let alone 12 months. How you receive this tax relief depends on the kind of pension you have. For example, with occupational or public service pension schemes, your employer will take pension contributions from your pay before deducting tax, which means you get the full tax relief straightaway. With a personal pension and some occupational pensions, you pay income tax on any earnings before your pensions
contribution. Your pensions provider will then claim tax back from the government at the basic rate of 20 per cent, so for every £80 you pay into your pension you end up with £100 in your pension pot.
Higher rate taxpayers
If you pay tax at the higher rate of 40 per cent, you claim the difference through your tax return. Make sure you do so, though – many higher rate tax payers assume that they will automatically get relief of 40 per cent and fail to contact HMRC about the difference. If you don’t pay tax, you can still pay into a pension and benefit from basic rate tax relief 20 per cent on the first £2,880 a year
Even in today’s difficult economic environment, contributing to a pension should open the doors to a number of tax perks you put in. However, you should be aware that there is no tax relief for contributions above this amount. You can also put money into someone else’s pension. They’ll get tax relief added to it at the basic rate, but this won’t affect your own tax bill. If they don’t pay tax, you can pay in up to £2,880 a year – that becomes £3,600 with tax relief. It’s also worth remembering that if your pension scheme’s rules allow it, you may be
able to boost someone else’s occupational or public service scheme, with your own cash. You’ll not get tax relief on your contribution but the other person can get relief either through their tax return or by making a claim to HMRC.
Paying tax
As a pensioner, you will avoid National Insurance payments, but you will pay tax. Many pensioners will see their tax-free allowances increase – the allowance goes up to over £9,940 if you’re between 65 and 74, and rises to £10,090 for those aged 75 or older. But once your taxable income hits £24,000, these extra personal allowances are gradually whittled away back down to the basic personal allowance of £7,475. Some people don’t realise that their state pension counts as taxable income – even though no tax is deducted when you receive it. If you have another form of pension income other than the state pension, HMRC will ask your pension provider to collect tax due on this income and your state pension at the same time. And if you’re still working, the tax on
your state pension will be collected either through your employer’s PAYE scheme, while if you also have a pension provider it will be done through their system. One word of warning – if your pension is collected through PAYE, be sure to double check that the pay code is correct. If you have no form of pension income other than the state pension and your income through this is high enough to create a tax liability on its own, you’ll have to fill in a self-assessment form. This can be confusing if you’ve never done it before – the HMRC website and TaxAid have helpful information. For more information on tax and pensions visit www.hmrc.gov.uk www.taxaid.org.uk
Pensions blunders and how to avoid them Get your financial decisions wrong and you could really pay the price later in life Getty Images
By Ruth Lythe and Scott Vincent
Putting it off
Giving up a final salary pension
If you’ve just entered the world of work, saving for a pension is probably the last thing on your mind, with student loans, rent and living expenses to pay. Every year matters, though – in fact so does every month. For example, a 25-yearold who postpones saving for retirement until they’re 30 can expect to see their pension at 65 reduced by about 30 per cent. Leave it later and the consequences could be even more dramatic.
This has to be among the biggest mistakes of them all and yet a report by accountants KPMG recently found that one in four private-sector employees has been lured by offers of payments worth thousands of pounds to abandon their final salary pension scheme. The benefits of occupational schemes are clear. For example, according to the Office for National Statistics the final salary schemes of public sector workers have allowed them to amass pensions up to eight times larger than workers on defined contribution schemes.
Failing to join your company scheme
Your employer is effectively offering you free money. Seize this opportunity with both hands, even if it means making the payments will be tough. But remember that a decent pension requires regular contributions of 15 per cent
or more of your income throughout your working life.
Opting for any old pension Plan now: avoid your retirement turning sour
Not all pensions are alike and it’s vital to know exactly what you’ve invested in. For
example, if you’re younger, it might pay to steer clear of plain offerings and opt for riskier solutions. On the other hand, if you’re nearing retirement, you will need to have your cash invested in less volatile assets such as cash and gilts. Check your fund’s investment performance and make sure they deserve to be looking after your own money.
Relying on the state
Don’t expect to live off the state pension. The basic state pension is just £102.15 a week for a single person and while it is set to increase eventually to a £140 flat pension as a result of a massive overhaul of state benefits, it’s not an income many of us would want to live on. The state pension age is also creeping up and could reach 67 by 2026, so relying on government support means you’ll have to work longer and later. If that happens, it pays to have other options.
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Your Pension · October 2011
AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH
Industry view
Shop to top up Lower your deficit your pension pot the intellectual way Shopping around for the right lifetime annuity could potentially increase your retirement income by some 20 per cent
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t’s probably not too much of a stretch to say that the purchase of a lifetime annuity with your pension fund is the most important financial decision you will make – second only to property purchase, perhaps. It could, after all, be paying you an income for over 30 years – over two-thirds of the normal working life. Despite this, 60 per cent of all annuities purchased in the UK last year were done so from the customers’ existing pension provider. This is even more surprising when you consider that research from PICA (the Pension Income Choice Association) has shown that customers could increase their retirement income by up to 20 per cent by shopping around at retirement. The above statistics pale into
insignificance when you consider other factors. For example only one per cent of annuities purchased direct from the existing provider contain any enhancement due to medical condition or lifestyle choice, when around 40 per cent of those at retirement age would qualify for an enhancement. Could it
Sixty per cent of all annuities purchased in the UK last year were done so from the customers’ existing pension provider be the weight of the decision – and they do not get much bigger – that results in us taking the path of least resistance? Most people undoubtedly feel they are ill-equipped and that the decision-making process is complex. Perhaps the fear of making a mistake encourages us to simply take what is on offer? This information alone should drive us all towards seeking the best deal for our annuity income when the time comes. You should also consider the options you choose for your retirement income – inflation proofing/ escalation, provision of a spouse’s pension. These decisions will be critical for your future income and if you are unsure then you should seek advice. A good place to start is the FSA’s Money Advice Service website. So when it comes to your decision the message is simple – shop around for the best deal for you. www.lv.com
Investing in intellectual property to control pension scheme deficits can reduce cash expenditure for companies Plugging deficits
Controlling pension scheme deficits continues to be a challenge for UK companies. With investment in intellectual property and other intangible assets outstripping investment in tangible assets throughout the last ten years, Justin McGilloway of Wedlake Bell LLP explains how companies are turning to this alternative investment to reduce pension deficits.
Why intellectual property?
Intellectual property refers to legal rights covering copyright, patents, trademarks, design rights, know-how contracts and client databases. Many are registrable, helping to establish their validity and enabling
This is a huge resource, which, if tapped correctly, could help reduce spiralling pension deficits exclusivity for commercial exploitation. This is a huge resource, which, if tapped correctly, could help reduce spiralling pension deficits.
How does this work?
The principle is simple: a company transfers intellectual property to a holding arrangement. McGilloway: controlling deficits is a challenge
The company pays royalties to the arrangement, which pays this income to the pension scheme.
The benefits
Traditionally, companies have reduced their deficits by using cash contributions and/ or contingent asset arrangements to fund schemes. Using intellectual property to plug scheme deficits can be significantly more attractive to pension scheme trustees and corporate sponsors. The benefits include: • cash preservation – the company reduces cash expenditure • deficit reduction – improvement in the scheme’s funding position • asset control – the intellectual property remains in the company’s control and can revert to the company at the end of the term • improved security – higher level of security for pension scheme trustees; and • tax – accelerates corporation tax benefits.
The future
In the most significant example, tour operator TUI Travel has agreed a deal with the trustees of its pension schemes to use the value of its Thomson and First Choice brands to cut its pension deficit. The UK Pensions Regulator has also acknowledged the usefulness of these types of arrangements. As more companies find ways to effectively monetise their intellectual property rights, many look towards their intellectual property to fund their pension deficits. Justin McGilloway is a Senior Associate at Wedlake Bell LLP www.wedlakebell.com
Invest in your future Make the most of market uncertainty and start saving for your future by investing in a flexible self-invested personal pension
P
ensions remain high on everyone’s agenda and continue to receive a great deal of media attention from, all too often, a negative perspective. However, pensions must remain at the forefront of our plans for retirement, whether retirement is closer than we would like, or whether we consider ourselves too young to think about it. One thing is certain – retire we will at some point – and the better prepared we are for that day, the easier our retirement will be. Despite the recent Hallett: pensions must remain at forefront of plans
One thing is certain – retire we will at some point – and the better prepared we are for that day, the easier our retirement will be drop in value of pension funds due to the volatility of the stock markets, it still remains a fact that the earlier we start saving into our pension pot, the more flexibility we will have at retirement. If we get the right advice along the way and use a flexible pension-planning wrapper, there are numerous options to diversify risk and utilise different strategies when
needed and minimise the impact from one asset class. The most flexible wrapper continues to be the full self-invested personal pension where individuals, either themselves, or with their adviser’s guidance, can take control of investment decisions and utilise the various and different investment options available. The investment options are far reaching from the traditional funds, stocks and shares to commercial property, gold bullion, and other unregulated investments such as forestry, residential funds and overseas hotel rooms. The self-invested personal pension offers a real opportunity to diversify and minimise risk within a flexible framework during growth – with the flexibility continuing at retirement as well.
The self-invested personal pension offers a real opportunity to diversify and minimise risk within a flexible framework during growth Carey Pensions UK are specialists in pension scheme administration, providing a full range of services for self-invested personal pensions, Small Self Administered Schemes and Workplace Pensions. Call Christine Hallett CEO on 01908 336010 or email enquiries@careypensions.co.uk www.careypensions.co.uk
Your Pension · October 2011
AN INDEPENDENT REPORT FROM LYONSDOWN, DISTRIBUTED WITH THE SUNDAY TELEGRAPH
Industry view
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Home thoughts from abroad If you’re retiring overseas, consider the options for maximising the potential of your pension
A
s if retiring abroad wasn’t attractive enough, it turns out that those who do may be able to get a better pension deal. The key to these advantages is qualified recognised overseas pension scheme – a QROPS. This is a pension scheme outside the UK which can receive transfers from UK pension schemes. Simon Harvey, director of overseas pensions transfer specialist Global QROPS, says: “Anyone with a deferred occupational pension or private pensions can transfer their fund to a QROPS. But to take full advantage of the benefits you must be planning to retire abroad.” The benefits offered by a QROPS are numerous. You don’t have to buy an annuity, for one thing, and in certain Davies: all needs should be considered
jurisdictions there’s little or even no tax on the pension payments. You also may be able to take 100 per cent of your pension as a lump sum, and death benefits in some QROPS are less restrictive than in UK schemes.
The benefits offered by a QROPS are numerous. You don’t have to buy an annuity and in certain jurisdiction there’s little or even no tax
Investment options may also be more varied than those offered by UK schemes, and with QROPS you can pass the fund on to your beneficiaries tax-free, which saves on inheritance tax. But with almost 1,800 schemes currently registered as QROPS on the HMRC website, choosing a scheme can
be complicated. “There are more than 40 QROPS jurisdictions, each with their own nuances, and many offer numerous schemes,” says Harvey. “Before choosing which QROPS will be a home for your pension, all your needs and objectives should be considered, as well as the local rules that determine what can be paid to scheme members,” says Paul Davies, co-director at Global QROPS. For example, he says, Guernsey, Malta and New Zealand all permit different levels of lump-sum payments, varying from 25 per cent to 100 per cent of the fund. Your country of residence and the jurisdiction of the QROPS are important factors. Harvey says: “If you retire in Australia, you could receive your pension Harvey: you must be planning to retire abroad
income tax-free from an Australianbased QROPS. However, with a QROPS based outside Australia, you could face Australian tax of up to 46.5 per cent on any income payments from the scheme.” Of course there are limitations. During the first five years of your overseas residency, you cannot accept any QROPS payments that would not be permitted under UK regulations without facing unauthorised payment charges. As a UK pension member has the option to transfer their funds to a jurisdiction outside of their country of residence, this could potentially provide the member with more flexible retirement options. Although in theory you can transfer your pensions to a QROPS anywhere, in practice people are more comfortable when their pension is in their country of residence. Global QROPS, which is regulated by the UK’s Financial Services Authority, offers a free initial assessment so you can find out if a QROPS is suitable for you, while all subsequent fees are pre-agreed with clients. www.globalqrops.com