Save for retirement
For an idea of what you’ll need to save yourself, you can check what you’ll receive from the state. The Pension Service calculates and pays pension entitlements and, as long as you’re more than 30 days away from state pension age, it’ll be able to give you a forecast of what you’ll receive. But, even if you’re entitled to the full state pension – £97.65 a week in 2010/11 and £156.15 for a couple – it’s unlikely you’ll want to rely on this alone.
Starting your pension planning as early as possible will help. For example, according to Legal & General, a 30-year-old wishing to retire at 65 on a pension of £500 a month in today’s money would need to save £236 a month. If they postponed their pension until they were 40, this monthly contribution would have increased to £372.
If you index your pension contri-butions you’ll take some of the pain out of these figures. As you earn more, your contributions will go up but, conversely, earlier amounts will be lower. For example, the average 30-year-old’s initial contribution reduces from £236 to £173 and the 40-year-old’s from £372 to £292. There are other ways to bump up your pension contributions too. Your employer can help and, from 2012 there will be a compulsory pension contribution of 3% from employers.
One of the most tax-efficient ways to get money into your pension is through salary sacrifice. With this, rather than taking part of your salary or a bonus, you redirect it to your pension. This reduces the amount of tax on your income but also means you and your employer make savings on national insurance. Some employers will also pass their national insurance savings on to you as additional pension contribution.
Combining your existing pension pots can reduce charges as well as make them easier to manage. It could also allow you to take advantage of the investment flexibility of a self-invested personal pension or SIPP.
If you do decide to consolidate your pensions it’s worth seeking financial advice. Some schemes can have penalties if you transfer out of them plus it’s important to check you’re not giving up a higher tax-free cash entitlement or preferential death benefits.
When thinking about your pension planning, also take into account your husband or wife’s pension. It may seem sensible to focus all the savings on the higher-rate taxpayer but by spreading it across both pensions you can take advantage of two personal allowances in retirement.
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 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.
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.