How to save for your future - 40-56 year olds
How do you picture your retirement - travelling the globe? Living by the seaside and enjoying the sun?
Sadly, millions of people will find such a comfortable existence out of reach, unless they start saving more into their pension.
Four in 10 people are not saving enough for their retirement and two in 10 are not saving anything at all, according to research from AXA.
Andy Zanelli, head of retirement planning at AXA Wealth, says: "Rising longevity means retirement is likely to be longer than ever before. Planning ahead and taking control of your financial future as early as possible is vital."
The good news is that it is never too late - or too early - to begin saving for the future. We explain how to get started whatever your age.
Age: 40 to 56
This is the time to start taking a serious interest in your retirement savings and increase your monthly contributions if necessary. Hopefully you are now earning more than in your 20s and can afford to put a bit extra away.
Go online and use a pension planning calculator - such as the one at moneyadviceservice.org.uk - to see if you are saving enough. Read your annual statement, as you need to know the current value of your fund, how much you and your employer contribute every month and roughly how much income you would like in retirement.
Remember, if you don't have access to a workplace pension or you simply want more flexibility with your investments, you can open a personal pension instead of or as well as your workplace pension.
Self-invested personal pensions (SIPPs), where you pick and monitor the investments yourself, give savers an enormous range of investment options, but you have to be confident when it comes to managing your own funds. Leading low-cost SIPP providers include Alliance Trust, Hargreaves Lansdown and AJ Bell.
Khalaf says your choice of investments at this age will depend partly on what age you are planning to retire, and your appetite for risk.
Someone in their early 40s may still have 20 years of work or more left, and so can afford to keep their money mainly invested in relatively risky assets such as equities, including some in emerging markets.
More cautious investors could consider a balanced managed fund, which aims for less volatility by investing in a broad range of securities.
Khalaf recommends AXA Framlington Managed Balanced. It has grown by 11.5% in the past year and is invested in low-risk gilts (UK government bonds) as well as companies such as HSBC, Glaxosmithkline, Vodafone and BP. Its annual charge is 1.25%.
Khalaf also likes the Schroder Managed Balanced fund for those looking for a broad mix. It grew by 11.6% last year and is invested in a range of Schroder funds, including UK equity, corporate bond, Asian and global high yield. It has a lower charge at 0.8%.
How to draw your pension
You've spent years saving into your pension. So how can you make sure you get the most out of it?
There are two main options when it comes to turning your pension fund into an income for retirement. One is to buy an annuity, where usually the entire pot is handed over to an insurer in return for a set income for life.
Anyone buying an annuity should shop around for the best deal; don't just accept the offer from your pension provider. You may be able to get a much higher income elsewhere.
When buying an annuity you should also declare any health or lifestyle issues such as smoking or high blood pressure. These could lead to a higher income, simply because you are not expected to live as long.
You also need to consider if you want an income that increases with inflation every year; and if you want your spouse to receive the pension after you die. Both these options will mean your starting income is smaller because the payments will have to increase later.
Buying an annuity is irreversible and can have a huge impact on the quality of your retirement. It is therefore worth getting expert advice.
Those with larger pension pots (around £150,000 or more, if you have no other sources of income) could consider income drawdown instead of an annuity. This involves taking a regular sum from your pension fund while keeping the rest of the money invested. You can still buy an annuity at a later date.
Auto-enrolment is here
All workers aged 22 or over and earning more than £8,105 a year will soon (if not already) be automatically enrolled by their employer into a workplace pension. Even better, employers have to contribute. From 2018 your employer will have to pay in at least 3% of your earnings.
You can opt out if you want, but the government is hoping the new system will provide millions of people with a pension for the first time.
Very large companies started enrolling workers last month, with smaller companies following over a period of several years. Ask your employer for more details. For more information go to moneywise.co.uk/auto-enrolment.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
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.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
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).
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).
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
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.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.