How to save for your future - 57+ 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: 57 plus
Retirement is now on the horizon and you need to think carefully about your options. Most people buy an annuity with their pension pot, which provides a regular income for life. If you plan to buy an annuity in the next few years, you need to start to reduce the level of risk in your portfolio, as your funds will have less time to recover from a major market fall before you need to access them.
Traditionally, investors move away from equities and start investing in bonds. These are loans for a set period at a fixed rate of income, to the UK government (known as gilts), to another government or to a company (corporate bonds).
However, Khalaf is wary of UK gilt funds because gilt yields are now at historic lows. He prefers exposure to corporate bonds, and suggests the Jupiter Strategic Bond, which has grown by 13.6% in the past year and has a 1.25% annual charge.
The fund invests in various bonds, including those from the Australian government and Microsoft. He also likes the M&G Optimal Income, which also has a 1.25% charge, returned 13.6% in the past year and has holdings in gilts, as well as Germany and US government bonds.
Now is also the time to get a state pension forecast from the Pensions Service (call 0845 3000 168). Continue to use an online pension planning calculator to see if your own savings are on track. This should avoid any nasty surprises when you come to retire.
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.
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).
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.