Put some zing into your pension
Whether you have several decades of work ahead of you or you're preparing to hang up your boots, the New Year is the perfect time to give your pension pot a shot in the arm.
Most of us, aware that we're living longer and cannot rely on the state to provide for our retirement, know we need to pay more into our pension. But let's face it, there are more exciting ways to spend any spare cash.
However, the rewards for shaking off the lethargy and tackling your pension head-on are greater than ever before. Changes introduced to pension rules in April 2006 dramatically opened up the options available to you when it comes to getting the most out of your pension, regardless of your circumstances. So, here are a few simple steps that can make a big difference to the pension you retire with.
Top up your company scheme
If you have access to a good employer's scheme, make the most of it. A scheme will either be linked to your final salary or to contributions by you and your employer. The new pension rules mean you can pay in as much as 100% of your salary up to a maximum of £235,000 a year and get tax-relief on it.
Usually, your employer will contribute to the scheme, and most will match any contributions made by you, so it would be foolish not to take advantage of this. Your pension scheme booklet should explain how the pension plan works and what your entitlements are.
Receiving a bonus from your employer offers a good opportunity to give your pension a massive boost and save on tax. While it's tempting to take the bonus and spend it, or even put it into the pension yourself, you could maximise the bonus by using what's known as 'salary sacrifice'. Under a salary sacrifice arrangement, an employer will put your bonus into your pension, where it can amount to a much larger sum.
Under salary sacrifice, national insurance contributions, at 12.8%, are not deducted from the sum. So ask your employer if they would accept a bonus sacrifice arrangement, says Jason Witcombe from independent financial advisers, Evolve Financial Planning.
If you're lucky enough to have access to a final salary scheme, see if you can purchase additional years, as these schemes are gold-plated - unlike other pension plans, they provide a guaranteed benefit without the investment risk. Additional voluntary contributions (AVCs) can be used to buy extra years in final-salary pensions, so ask your employer if this is an option.
If you're a member of an occupational money purchase (or defined contribution) scheme, you can make AVCs alongside it to increase your pension, but there's no great benefit. AVCs were more valuable before April 2006, when there were restrictions on how much you could pay into a company and a personal pension at the same time.
While an employer's AVC will probably have lower charges than a personal pension, you may benefit from a wider investment choice and better performance by saving elsewhere, such as in a self-invested personal pension (SIPP).
Take out a stakeholder, personal pension or SIPP
If you're self-employed or not eligible to join your employer's scheme, stakeholders, personal pensions and SIPPs are the most obvious way to improve your pension position. If you are not earning, perhaps because you have taken a career break, you can still pay into a personal pension, but your contributions are limited to £3,600 a year, after tax relief.
Which type of personal pension you choose depends on how much you have to invest, your attitude to risk and the extent to which you want to take investment responsibility for your retirement fund. Stakeholder plans are the most basic form of personal pension and are designed for people seeking a no-fuss retirement savings vehicle.
"Stakeholders are simple, with a minimum contribution of just £20 a month and a simple charging structure," explains Tom McPhail, head of pensions research at IFA Hargreaves Lansdown. "Also, there are usually no more than 20 funds on offer, so if you want an easy option that requires minimum input, this might be the right solution."
Alternatively, using a personal pension will give access to a wider range of investment opportunities. Many personal pension providers have brought their plans in line with the stakeholder model, capping charges at 1.5% a year for the first 10 years and 1% thereafter. But be aware that there is still no limit on personal pension charges outside a stakeholder, so check what these are before you apply.
For some, typically those with a decent-sized pension pot to invest, SIPPs can be attractive. "SIPPs come at a higher cost," says Philip Pearson of Southampton-based IFA P&P Invest, "but there are more investment options, which include commercial property and individual shares."
Dealing charges and management fees can vary dramatically between providers and can be hefty, making SIPPs better suited to high-net-worth individuals. As well as set-up charges of between £400 and £500 - and similar annual charges - you face initial and annual charges for each investment.
These charges can make a big difference to your investment over the long term, so it's only really worth it with a pension pot of at least £50,000, and preferably around £100,000 or more.
McPhail says: "If you are really interested in what happens to your pension, you should look more widely and consider SIPPs. You can often monitor your pension online, so these promote investor engagement."
Set up other investments
Of course, pensions aren't the only way to save for your retirement. You can top up your retirement income using an array of other investments. You can, for example, save the maximum amount each year into individual savings accounts (ISA), shares and bonds, or invest in property. "It is important not to put all your eggs in one basket," says Pearson. "This is especially true when planning a lifetime of saving towards retirement."
Tax-efficient investments running alongside pensions include ISAs (both stocks and shares and cash), Government-backed National Savings & Investments products and venture capital trusts (VCTs), which are at the top end of the risk scale. Similarly, some investment bonds can have tax benefits, depending on your tax status.
For most people, building up money in an ISA as well as their pension makes the most sense, given the tax-free status enjoyed by ISAs. You can put up to £3,600 a year into a cash ISA or £7,200 into an equity ISA, either invested entirely in the stockmarket or split between cash and equity funds.
Saving into a company or personal pension is advantageous, as your contributions benefit from tax relief, but you cannot access the money until you retire, as you can with some other investments. Also, while the tax benefits make paying into a pension a smart idea, regardless of your circumstances, you might want to think twice about paying in more than you need to if you have a mortgage to pay or debts to clear, or if you're not using your full ISA allowance.
But don't put off the decision to save for retirement indefinitely, as it only means you'll have to put away more money further down the line. The earlier you start paying into a pension, the longer it has to grow - giving you the chance to enjoy a long and comfortable retirement.
A tax-efficient way of receiving staff benefits, where an employee agrees to forego a proportion of their salary for an equivalent contribution into their pension scheme or in exchange for company car, gym membership, childcare vouchers or private medical insurance. A salary sacrifice scheme is a matter of employment law, not tax law, and is often entered by an employee who is about to move into the higher 40% tax bracket.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Additional voluntary contributions
If you’re a member of an occupational pension scheme but want to increase your contributions to help boost your income in retirement, this is where AVCs come in. An AVC is a top-up pension that sits alongside your company pension and is administered by your employer. You get tax relief on your contributions and, if you move jobs, you can apply to transfer your AVC plan to your new employer or your AVC your contributions have to stop with your old employer and you will need to start a new AVC plan with your new employer. An AVC linked to a company scheme is subject to the rules of the main pension. (See Free-standing additional voluntary contribution).