10 tips to freshen up your pension
1. Review investment funds
Review the investment allocation of the portfolio at least once a year, to see if the underlying holdings are still in line with your overall risk profile and expectations.
Martin Bamford, IFA at Informed Choice, says it's important to review the underlying asset allocation in your pension portfolio, as it's this that dictates the level of risk you are taking with your retirement funds.
"As you get closer to retirement, if you are planning to purchase an annuity, it makes sense to reduce the overall level of risk you are taking with your pensions. This reduces the likelihood that short-term market falls will derail or delay your retirement plans," he says.
Meanwhile, make sure your portfolio invests across a range of asset classes including cash, property, equities and bonds to reduce risk.
2. Check out your employer's scheme
Most employers offer workplace pension schemes, and from 2012, everyone will be able to save through work with the introduction of National Employment Savings Trust (NEST). Total contributions will be at least 8% of your salary, of which the employer will contribute at least 3%.
People that don't have access to a good company pension will be automatically enrolled into NEST. Ask your employer what pension arrangements are available: it might contribute to your pension, which is a valuable boost.
"Even if they don't contribute, employers are often able to negotiate cheaper charges on pension contracts than you may be able to find yourself. Therefore for most people it makes sense to join your employer's pension scheme," says Patrick Connolly, financial planner at AWD Chase de Vere.
In addition, many employers offer salary sacrifice on pension contributions. This means the employee is paid less, with the difference going into their pension scheme, and the employee doesn't have to pay National Insurance on the contributions.
3. Check state retirement age
Checking your state retirement age should be the first port of call for retirement planning.
Currently, the state pension age stands at 65 for both men and women, but from December 2018, this will be raised to 66. It will continue to creep up to reach 68 sometime between 2044 and 2046 under the current laws. Knowing your state pension age allows you to plan when you might be able to start taking benefits. You can get a projection at www.direct.gov.uk.
Connolly says: "The state pension age is increasing, and will continue to increase as people live longer, so you need to be aware of this and make allowance for it as part of your retirement planning."
4. Review and understand projections
It's a good idea to regularly check that your pension projection marries with how much you are expecting to retire with. "Every year you should get a statement from your pension provider telling you how much is in your pension and a projection of how much this will be worth when you reach your selected retirement age," says Connolly.
It's important to realise the value of your pension fund when you retire.
For example, a pension fund of £100,000 may sound a huge amount, but for a man retiring at 65 looking for an income to rise in line with inflation plus a pension for his spouse if he dies, he will only get a monthly income of less than £300 - which isn't much to live on.
5. Review pension charges
With inflation and interest rates already eating away at savings, it's doubly important not to let pension charges take any more money from your pot.
"Many older pension contracts have charges which are much higher than those available today," says Connolly.
"You should look to see if you can reduce the amount you are paying. But great care must be taken before considering any form of pension transfer because you could be giving up guaranteed benefits or bonuses if you transfer away and there may also be charges for moving your pension."
In addition, there are the underlying charges on the funds or trusts in your portfolio to be considered - if an active fund is creaming off more than 2% a year, but performing poorly, could you be better off with a passive portfolio?
It's also helpful to keep abreast of what's happening with inflation: with the Consumer Prices Index at 4.5%, and pension charges eating away at gains, it might be that you're not making money in real terms.
6. Check if your pension is in a closed fund
Many old-style pensions could be languishing in so-called 'closed funds' - older pension funds closed to new business.
Inevitably, these closed funds, common in the days before stakeholder pensions, tend to underperform, have poor managers and higher charges than other pension funds.
If you suspect your money is stuck in a closed fund, take it out sharpish as you can get a better return elsewhere.
7. Beware the lifetime allowance
Anyone with a pension pot of around £200,000 or more needs to check whether they are in danger of exceeding the lifetime allowance, which is due to reduce from £1.8 million to £1.5 million in April next year.
Adrian Walker, Skandia's pension expert, comments: "£1.5 million sounds like a lot of money but if someone has 30 years until retirement they may only need a current pension fund of £197,000 to exceed that level before they retire based on a net investment growth rate of 7%."
Anything over £1.5 million when people take their pension benefits after the beginning of the next tax year will be taxed at 55%. However, people can register for "fixed protection" which will protect pensions up to today's lifetime allowance of £1.8 million.
People have from now until the end of the tax year (5 April 2012) to apply for it through HM Revenue & Customs.
8. Use ISAs to complement pensions
Both ISAs and pensions offer attractive tax breaks.
But rather than being mutually exclusive, ISAs can complement pensions nicely, says Chadborn. "ISAs are much more flexible, so you should consider your ISA allowance when saving into a pension. If you're retiring prior to age 65, annuity rates are currently very low. An ISA can help to bridge the gap between retirement and actually drawing a pension," he says.
9. Consolidate old pensions
It's quite common nowadays to move between different jobs, holding pensions with each employer. While they should all continue to perform, it makes sense to combine them into one single pot to monitor performance much more easily.
"Have a look at fund choice and charges," says Jason Witcombe, financial planner at Evole Financial Planning. "If your current employer's scheme is lower cost and offers comparable fund choice, consider transferring and reducing costs and personal administration."
However, the same advice under the 'Review Pension Charges' tip applies here: make sure you won't be giving up any guaranteed annuity rates and beware any transfer penalties. This applies to defined contribution schemes, rather than final salary schemes.
10. Make the most out of tax relief
"We all know that pensions are a bit dull but short of a trip to Las Vegas, where else can you double your money overnight?" says Witcombe, pointing out that a 50% taxpayer can choose between having £5,000 in their pocket, or £10,000 in their pension, effectively doubling their cash overnight.
In fact, he says, anyone earning over £42,475 a year can get a "really attractive" tax break. Witcombe adds: "Pensions really should be treated as your friend not your foe."
Meanwhile, check you're getting the correct tax relief on your pension. Many employers will give tax relief at the basic 20% rate, but if you're a higher-rate taxpayer, you're entitled to the 40 or even 50% relief. Check with your HR team whether you receive all the tax relief via the payroll. If you haven't been getting your full relief then contact HMRC for a refund.
This article was written for our sister website, Money Observer.
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 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.
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.
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.
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.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.