Your pension questions answered
Should i stick with my pension or start saving?
Q: I am 30 years old and have been paying into my work pension for nine years. I currently contribute £60 a month and my employer matches that amount. However, a colleague states that she opted out of the pension and instead pays £60 per month into a savings account. She thinks this is a better idea as the value of her savings cannot fall, whereas pension investments can, therefore she has guaranteed funds when she retires. Should I follow her lead?
I also have a mortgage that currently costs £620 per month and wondered if rather than investing in my work's pension or savings, I would be better off paying an extra £60 per month off my mortgage? The current interest rate is 4.79% and there is 35 years left on my mortgage term.
A: Philip Pearson is a partner at P&P Invest in Southampton
You made the right decision to join your employer's occupational pension scheme nine years ago. In retirement, a significant sum of money will be required in order to replace your income when you stop working. To build up this sum you will need to commit to saving over the long term, so the sooner you start saving the better.
A pension offers significant benefits over a standard savings account. The most important benefit in using the pension organised by your employer is that it currently matches your contributions. This means that £120 each month is being invested at a cost to you of only £60.
In addition, pension contributions benefit from tax relief with HM Revenue & Customs (HMRC) refunding the income tax you've paid on your contribution straight into your pension. If you are a basic-rate taxpayer, HMRC will top up each of your pension contributions by 20%. So, in order to match the same amount being paid into your pension with alternative forms of saving you would need to be saving £150 a month.
When it comes to growth your colleague is right, cash is safer than pension investments as the face value of cash can't fall. However, cash can't match the growth rates available from other assets. It is likely that your pension is invested in a range of assets, including bonds and shares. These are proven to provide a significantly greater return than cash over the long term.
Interest rates are at an historic low, with most saving accounts failing to provide growth that counteracts the erosion of inflation. It is likely that interest rates will remain low for many years to come, so cash-based savings are unlikely to grow fast enough to keep up with the rising cost of living.
I would suggest that your colleague has made a serious error in opting out of your employer's pension scheme if she is intending to save for retirement.
As for overpaying your mortgage, I think saving for your retirement should be your bigger priority. It would appear that the amount you are investing in your pension is extremely modest and is only likely to provide a very low income at retirement. As a guide, you should be aiming to invest 10% of your salary into your pension before the age of 30, rising to a minimum of 15% of your salary when you move into your 30s.
My advice would be to increase your regular monthly saving commitment by reviewing your monthly budget. If funds allow, increase your pension saving and only then make overpayments against your mortgage in order to reduce the debt and the cost of interest over the long term.
With pension payments going down, should we get an annuity now or wait?
Q: My husband has just turned 60 and has a personal pension with a guaranteed income, which he can access at 65. We read that pension payouts are going down, particularly now with the state of the economy. It's only a small pension but would he be better off sacrificing the guarantee to cash it in now and buy an annuity before rates go down any further? Or should we wait until he turns 65?
A: Peter Chadborn is co-director of Plan Money
Before you do anything, you need to find out the value of the guaranteed annuity rate. This is because even with declining annuity rates and faltering investment returns, it could be the case that the guaranteed income is still better than what you would get on the open market.
You need to compare the potential income available today from a suitable annuity purchased on the open market, with the projected annuity you would get from the existing pension provider which would pay out the guaranteed income.
Then you need to work out the 'cost of delay'. This is where you factor in the reality that each year an annuity is not taken is effectively a year's 'lost' income. Therefore the projected deferred income with the guarantee not only needs to be higher than current annuity rates, it also needs to be sufficiently higher to allow for five years 'lost' income. An independent financial adviser will be able to help you with this important comparison.
I need to sort out my pension
Q: I’ve just started a new job and there is no pension scheme available. I have two old pensions from previous employers – can I combine these in one place? Also where should I go to start up a new pension or can I just start saving into one of my existing pensions?
A: Francis Klonowski is principal of Klonowski & Co in Leeds
There are so many possibilities to consider here.
It is always tempting to wrap all your previous pensions into one pension pot, and it certainly makes them easier to manage. You can tailor the investments, and you have one statement each year, making it easier to see your anticipated benefits at retirement.
However, there is a lot to consider before you do this. What type of schemes are you in? What are the current investments? Would your annual costs rise or fall? And are there any transfer costs? Assuming it is feasible to transfer both schemes into one, where you should put them depends on how much you have in each one.
A low-cost personal pension or stakeholder plan may be suitable for smaller accounts, but if you have more than £50,000 in total you should consider a self-invested personal pension (SIPP). There are low-cost ones available, that allow you to choose a range of funds and shares to suit your requirements.
As for where you should go, you could take professional independent advice - preferably from a fee-based adviser who charges for their time rather than one who relies on product sales and commission. Alternatively, you could try the Financial Services Authority website moneymadeclear. co.uk, where you will find a simple guide to selecting a pension based on various criteria.
When it comes to new contributions, it depends on what kind of scheme you had. If it was a group personal pension, then it remains in your name and you should be able to contribute to it. If it was an employer-sponsored scheme such as a group money purchase scheme – into which the employer was obliged to contribute - then it remains with the trustees. This means you would not be able to make further contributions.
To add further complication, from next year you should be enrolled into the workplace pension scheme NEST. One advantage of this is that it is designed to take with you when you move jobs, so you won’t have the same dilemma as you face now. As yet there hasn’t been any explanation about whether you will be able to transfer money in from previous schemes.
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.
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.