Saving for your pension: people in their 60s
Savers can now do what they like with their pensions savings once they reach the age of 55. Some people may take the cash and spend it as they choose, others will remain invested and draw an income, while others will stick with an annuity. Many will really take advantage of the new freedoms and do a bit of everything.
But what route you go down, the challenge right now is to save as much as you can. Pensions, after all, are a hugely tax-efficient way of saving - essentially, you are getting free money. If you are a lower-rate taxpayer, for every £80 you save the government will top this up to £100; and if you are a higher-rate taxpayer, you need to put away just £60 to get the same amount.
Recent figures, however, from the Department for Work & Pensions revealed almost 12 million of us are still not saving enough, so whether you are retiring in the next year or have 20 years to go, we look at what you need to do now to ensure a prosperous retirement.
Saving in your 60s
The hard work should hopefully have been done by now but there are still many factors to consider. The vast majority of people are still working in their 60s and aside from those in final salary pension schemes, which have a retirement age of 60, that is a pattern which is likely to continue as people work later in life.
At this point, living costs should have significantly reduced with children having grown up and mortgages hopefully paid off. The focus at this point is likely to be on retirement planning and ensuring that everything is on track to give you the required standard of living you are looking for when you finish working. Your investments should be more conservative at this stage, too, in order to protect the wealth you have built up.
Most significantly, you should also have a good idea as to how you will use your pension. In the last five years before you plan to start drawing your pension, you should have your investments in broadly the right place to support your retirement income plans. You should be taking a look at current annuity rates and at your options for income drawdown; what would be a sustainable income if you were to draw an income from the fund.
Tom McPhail, head of pensions research at Hargreaves Lansdown says: "If you'll use drawdown, this means mainly shares with good income prospects, plus some cash and bonds; if annuities, then mainly in investment- grade corporate bonds and gilts; and if you are planning to take cash, then don't leave it until the last moment to sell your investments."
Do your research
Undoubtedly, your pension provider will have sent you a plethora of booklets to read – do not ignore them, especially given the increased flexibility but also rising complexities around pensions. It might be a good time to seek independent financial advice, to ensure you understand your options. Retirees in poor health or who smoke may be able to receive a much better rate of income than everyone else, so check if this apply to you.
John Lawson, head of policy at Aviva adds: "Different providers will offer different rates that give you different amounts of income, so if you select an annuity it is really important to shop around on the open market for the best rates for your individual circumstances. Think about whether you want to provide a contingent pension for your spouse, whether you want to protect your pension against inflation or whether you want to leave your pension invested and take an income from your remaining pension savings."
A quick word of caution - while hopefully it is not an issue by now, retiring while heavily in debt is obviously not recommended. Even if you have not yet retired, your pension could be used as a means of repayment.
In fact, following a High Court ruling in 2012, if you have reached retirement age and are subject to bankruptcy proceedings, then creditors may be able to force you into taking pension benefits to recover debts owed.
Most people at this stage of their life are focused on generating income to provide a comfortable standard of living for the rest of their lives. As such, their investment choices are likely to be very low down on the risk spectrum, with arguably the vast majority sitting in cash, where at least the only threat is inflation.
However, retirees who have not bought an annuity may find they need to remain in at least some riskier investments in order to replenish their nest egg. But remember even after retirement, you can still pay up to £3,600 into your pension every year and if you have some spare savings, this can be a good way to boost your income as you will receive tax relief on any payments you make in.
Patrick Connolly, a chartered financial planner at Chase de Vere says: "Having catered for their own financial planning requirements, many people will be looking at estate planning and how they can leave assets to future generations when they die. With increasing longevity, many people can expect to live long beyond their 70s and so it is important that they plan with this in mind."
Investing in your 60s
At this stage, an income-producing balancing fund or portfolio will be desirable, and experts recommend funds that invest across a range of asset classes to reduce risk compared to a pure equity fund.
GavinHaynes, managing director of Whitechurch Securities, cites the JP Morgan Multi-Asset Income Fund, which aims to provide an attractive income-focused return through a blended portfolio of a variety of different and uncorrelated investments.
Connolly tips the Schroder Multi Manager Diversity Fund. He say: "This is an ideal choice for a cautious investor, essentially being a whole portfolio in one fund. It invests about one-third in equities, one-third in cash and fixed interest and one-third in alternative investments such as commodities."
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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.
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 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.
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.
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).
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
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.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.