Start early to plan for retirement.

We live in a time when the state pension age is increasing, the number of DB (Defined Benefit) Pension Schemes open to new members is decreasing, and more and more individuals will rely on DC (Defined Contribution) Pension Schemes in their retirement.

As a result of Auto Enrolment, it’s true to say the more people than ever are saving for their retirement. But the question is, will it be enough? For some, saving for retirement is at the bottom of their “to do” list.  Even if it’s on their agenda, they may not be in a position to save as much as they would like.

A question I am often asked is “How much do I need to contribute?” Of course, the answer to that is another question, “What sort of life style do you want in retirement?”  And the answer to that can range from “I don’t know” to “I don’t want to change my life style from what I have at present”.

Yes, we can make an educated guess, using assumed growth rates and assumed life styles. But that’s what the are – Assumed!

The best answer is generally, start early, ie in your teens or twenties and give yourself plenty of time to build up a substantial pension fund.  Apologies to those of you who have just missed those age groups.   But maybe you could encourage your children to start early.  Trouble is when you’re a teenager, you’re never going to get old, are you?

Remember, it’s not “the timing of the market”, it’s the “time in the market”.

Claire Trott: Public still has it wrong on pensions versus property

Latest statistics show personal pensions, in particular, get a bad rap

The recently published preliminary estimates from the Office for National Statistics’ Wealth and Assets Survey make for interesting reading with regards to how people view pension savings and how safe they are.

This survey has been run numerous times in recent years and it is always clear those questioned see employer pensions and property the safest way to save for retirement. They have actually attracted an even greater share of the votes in the last two rounds of the survey than previously.

The fact employer pensions saw 40 per cent of votes is a good thing but it does not tell the whole story. I wonder how much of this increase is because of automatic enrolment.

What is disappointing is that only 13 per cent thought that personal pensions were the safest way to save. With the move from defined benefit schemes to defined contribution schemes, there will be very little difference in the two. The fact employer schemes should at least have some additional contributions may make them more popular but it does not make them any safer.

It will be interesting to see if this becomes more aligned in future when DB schemes become even rarer.

On the flip side, when looking at which method of saving for retirement will make the most money, employer pensions came in a poor second, with 22 per cent of votes.

The top spot went to property, with 49 per cent. While this is no surprise, it does begs the question as to whether this is the right way for the public to consider it.

I know that the question put to the voters was not about what they had actually invested in but it is clear that those looking for bigger returns consider property to be the best option.

Of course, this is often not the case.

As we know, pensions offer tax relief and tax free growth while invested, whereas property has ongoing costs, costs when finally sold and tax on profits.

And personal pensions? 6 per cent of those surveyed believed they would make the most money. This is the most disappointing finding. We all know they are able to invest in the same, if not a more diversified, range of assets than the employer schemes and even property in some cases.

The need for education about retirement options is still clear. Retirement is not a single investment at a single point in time. All the options in terms of saving for the short and the long term need to be considered. All savings can work for retirement; clients do not need to put all their eggs in one basket.

As always, advice is key as they progress through life.

 

Claire Trott is head of pensions strategy at Technical Connection

Industry Voice: I’ll think about my pension next year

“I’ll think about my pension next year”. It isn’t unusual for clients to make this statement. Often they think they can leave it until they have more money, have paid off the mortgage, built up the business and so on. That strategy used to work. However, the reduction in Annual Allowance (AA), removal of year of vesting exemption and the potential for the tapered Annual Allowance to apply at some point makes it harder to build up the same size of funds as before. Making sure allowances are used could be crucial.

Carry forward – how does it work?

As unused Annual Allowance can only be carried forward from the three previous tax years and only after the current Annual Allowance has been fully used. However, what is sometimes forgotten is that you have to have been a member of a UK registered pension scheme for any year you are carrying forward from.

Making use of prior year’s unused allowance requires that the current year’s allowance is used first. This means carry forward is only appropriate for clients with relevant income over their 2017/18 Annual Allowance (unless the contribution is made by an employer, as employer contributions are not limited by the individual’s relevant income). You then go back to the furthest away tax year, in this case 2014/15 for any excess that is using carry forward.

Planning around using carry forward

To ensure that unused allowance from 2014/15 can be used up this year using carry forward first identify unused allowance from pension input periods ending in 2014/15. Second, make a sufficiently large pension contribution so total inputs are at least the unused allowance amount plus the relevant Annual Allowance for the 2017/18 tax year.

It should always be remembered that if the contribution is to be made as a personal contribution (that is, not an employer contribution) the pension member will need to have sufficient ‘relevant income’ to support any level of pension contribution.