DIY Investor Magazine
/
Jan 2017
40
CHOOSE LIFE – DON’T WANT YOUR PENSION FREEDOM?
Nobody wants to believe that perma-tanned, lithe
blond-bombshells could become reclusive because of
their embarrassment at the amount of weight they have
piled on following years of every conceivable over-
indulgence; but even the abstemious are rarely spared
Old Father Time’s attention.
Admittedly, you’re still looking pretty good, all things
considered, but maybe now is the time to bite the bullet
and get to grips with that pension and give yourself the
opportunity to choose the life you want in retirement.
Given that life expectancy in the UK (outside of celebrity
circles) has now reached 81.5, as identified by a recent
YouGov survey for M&G Investments, there are a lot
of pension pots out there that are going to struggle to
deliver the quality of life that savers aspire to -
However, there are a number of things that you can do
to make sure that you are managing your pension in the
most efficient way, or are at least aware of what your
retirement might look like; a few hours invested now
could deliver life-long benefits.
Firstly, take stock
; most of us will have accumulated
a number of pots during our working life, and subject
to us having made the requisite 35 years of National
Insurance contributions, will also have call on the full
state pension of £8,000 a year – check your state
pension forecast
Notwithstanding the well-documented near
that exists, those with a defined benefit
(sometimes ‘final salary’ scheme) are still considered
to have the blue riband in pension circles and you may
also have additional savings in ‘defined contribution’
(DC) pots.
In the past a DC pot would have necessarily have been
used to buy you an income for the rest of your natural
upon your retirement – an annuity – and for the sake of
illustration you should work out what your DC pots would
buy you in today’s annuity market
Then
, consider all of the companies you have
worked for in the past – if necessary you may use the
government’s free
– and build
an overall picture of your total net worth in retirement.
You may ultimately decide to eschew the certainty
and security of an annuity, but it is worth working out
precisely what your total provision would translate to as
an annual income – a rule of thumb is that £1000 saved
into a DC scheme will buy you £45 a year for life.
You should now be able to weigh up the total annual
income that you can achieve from the pots you have
accrued with the retirement you aspire to.
OK, breathe
; it’s not the answer you hoped for, but
you can do something about it by increasing your
contributions.
Because of auto enrolment, most in work now have the
opportunity to save into a pension and your employer is
legally required to contribute a minimum of 1% of your
salary; however, many firms will offer staff much higher
amounts if you save more, up to a cap – 5% on either
side is common.
According to Pensions Policy Institute, saving 14%
through auto-enrolment gives younger earners a two-
thirds chance of retiring on two-thirds of their salary –
the level it is believed is required to maintain an existing
lifestyle in retirement.
Keep hold of it;
now that your contributions are up to
scratch, make sure that you are not giving it away by
missing out on tax efficiencies.
Despite Mr Osborne’s numerous raids, tax incentives on
pensions remain generous; tax relief is paid up to your
highest rate of income tax , so a higher-rate payer only
needs to pay £60 to make a £100 contribution.
However, pension companies only automatically
claim tax relief at the basic rate of 20% and it is left to
individuals to claim the higher and additional-rate sums
owed to them via their tax return; an estimated £360m
It was a remarkable year on so many
fronts, and many of us looking back on
the long list of celebrities who took a
final bow in 2016 will find it difficult not
to feel wistful for our departed youth
and perhaps a slightly heightened
sense of our own mortality.
