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A comfortable retirement

Avoiding a pensions shortfall

According to recent studies, many people are not putting enough money aside to ensure that they are able to enjoy a comfortable retirement. In fact, around half of the UK population are failing to save sufficient funds for their retirement, suggesting that Britain is facing a pensions shortfall.

You might not want to think about it now, but sooner or later being able to retire when and how you want is likely to be one of your foremost financial objectives. Achieving a comfortable retirement will take planning and implementation. Unless you are in the fortunate position of having a final salary pension scheme which is not underfunded you will almost certainly need to augment your state pension. Remember, you could spend a third of your life in retirement, so make sure you take steps to ensure that this period is as financially secure as possible.

Planning for your retirement

As well as your age and the number of years before retirement, your planning strategy will be determined by a number of factors:

You can request a forecast of your state pension from the State Pension Forecast Service, by logging on to the Directgov website: www.direct.gov.uk

Relying on your state pension, which this year is just under £8,120 for a married couple, is an unrealistic proposition at best.

There is an overall lifetime limit on tax-advantaged pension funds of £1.8 million (2010/11). There is a tax charge for fund values in excess of the ‘lifetime allowance’ at retirement, and for excess contributions or increases (set at £255,000 in a policy year for 2010/11). Transitional arrangements protect those who had already reached the ‘lifetime’ savings limit at 5 April 2006.

Company pensions

There are two kinds of company pension scheme, into which you and your employer may make contributions. A final salary scheme pays a retirement income related to the amount you are earning when you stop work, while a money purchase scheme instead reflects the amount invested and the underlying investment fund performance. In both cases, you will have access to tax-free cash as well as to the actual pension.

The impact of the early-noughties stock market downturn was one key factor that resulted in many final salary schemes being underfunded and a decision taken by many firms to close such schemes. Many experts consider that this type of scheme will cease to exist over the next few years, as a result of the current situation. Where companies do provide company pensions these are now almost always based on money purchase.

Those already in company pension schemes should be aware that the rate at which personal contributions can qualify for tax relief is now limited to the greater of £3,600 and total UK relevant earnings, subject to scheme rules.

Private pensions

If you are not in a company scheme, you should make your own arrangements, since relying on the state pension is already unwise, and will become more so with each passing year. (See table below).

SIPPs

In response to poor performances from pension fund managers, some retirement savers have switched their pension savings into Self Invested Personal Pension policies (SIPPs) – a form of personal pension plan which gives the investor more influence over how the funds are invested.

Personal pension schemes

To qualify for income tax relief, investments in personal pensions are limited to the greater of £3,600 and the amount of your UK relevant earnings, but subject also to the annual allowance (£255,000 for 2010/11) in all years except the year in which you retire.
 

Tax year
Annual
allowance
(input amount)
Tax charge
on excess
Lifetime allowance
Tax charge (excess
paid as annuity)
Tax charge (excess
paid as lump sum)
2006/ 07

£215,000

 

40%

£1.5 million

 

25% on excess value,
then up to 40% on
annuity

 

55% on excess value
2007/ 08

£225,000

£1.6 million
2008/ 09

£235,000

£1.65 million
2009/ 10

£245,000

£1.75 million
2010/ 11

£255,000

£1.8 million

Premiums on personal pension policies and stakeholder pensions are payable net of basic rate tax relief at source, with any appropriate higher rate relief usually being claimed via the PAYE code or self assessment tax return.

See Case Study 6 below for an example of this.

You will normally have selected one fund, or a spread of funds, for your pension savings. Would a switch give you more security or the scope for more growth?

Case Study 6

Stuart will earn £60,000 in 2010/11. He will invest £12,500 into his personal pension policy. He has no other income and claims only the basic personal allowance. Stuart will pay his pension provider the premium, net of basic rate tax relief, £10,000.

He is also entitled to higher rate tax relief on the gross premium, amounting to £2,500. As Stuart is an employee, we can ask HMRC to give the relief through his PAYE code.

Otherwise, we would claim in Stuart’s 2011 tax return. Thus the net cost to Stuart of a £12,500 contribution to his pension policy is just £7,500.

Stakeholder pensions

Stakeholder pension policy providers are required to accept premiums of a minimum of £20 per month, although some will accept less.

There are a number of ‘standards’ providers must meet, including a cap on charges – for new policies of 1.5% per annum for the first ten years, then 1%. Additional premiums are subject to the same rules as for personal pension policies. Stakeholder premiums can be paid on behalf of another person – for example, by a grandparent for an infant grandchild.

Retirement annuities

Unlike personal pension providers, most retirement annuity providers – personal pension schemes set up before July 1988 – don’t offer a ‘relief at source’ scheme whereby they claim back tax at the basic rate. Instead we claim the tax relief you’re due through your self assessment tax return, or if you don’t complete a tax return by contacting HMRC on your behalf.

The Special Annual Allowance Charge

It was expected that, from April 2011, the tax relief on pension savings by those with taxable incomes of £150,000 or more would be gradually scaled back to the basic rate. Those plans are being reconsidered.

To forestall attempts by those with income of £130,000 or more to increase savings before 2011, there is a tax charge on contributions over a certain amount (the Special Annual Allowance). This amount will be set at £20,000 or, if higher, the normal ongoing monthly or quarterly contributions. For those making infrequent or irregular contributions, the amount will be set at £30,000 or, if lower, the average of contributions in the three preceding tax years, subject to a minimum of £20,000.

So is the tax relief still worthwhile?

Many people are not affected by the new rules.

Those earning £112,950 could pay £12,950 gross premiums and effectively obtain tax relief at 60% - 40% relief on the premiums and an additional effective 20% by virtue of recovering the personal allowance.

Relief may otherwise be due at up to 50%, 40%, down to 20% for those paying basic rate tax.

Valuable tax relief is clearly available – discuss your pension savings options with us and your IFA to ensure maximum relief is obtained.

Your home and your retirement fund

Although they might not be suitable for everyone, there are at least two ways to make your home boost your retirement finances. The first is down-sizing – selling your current home and buying something cheaper, to release value now tied up in your property for other purposes.

If you wish to continue living in the same property, ‘equity release’ might be an alternative approach. Equity release might not suit everyone, and you should discuss all the implications with us and your other financial advisers.

Early planning

Although it’s never too late to plan for your retirement, the earlier you start, the more chance you will have to accumulate the funds you will need. In the current climate, whether you choose to focus on pension savings, alternative savings and investment strategies, or a combination of both, your investments will need time to grow.

Talk to us about key points such as: