Saving for your pension: people in their 50s
But whatever route you're planning to take, 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 50s
Your retirement is nearly in sight. Most people at this point will be approaching, if not already at, their maximum earnings. Monthly costs, such as mortgage payments, may also have reduced but despite the greater wealth, it is still advisable to keep a firm
eye on any unsecured debts and ensure they do not become unwieldy.
At this stage, do all you can to increase your savings contributions, not only to your pension but also your Isa. Bear in mind you have an annual pension savings limit of £40,000 and that the maximum you can save over your lifetime is currently £1.25 million (falling to £1m in April 2016) – anything on top will be taxable.
Given that you can access your pension from age 55 if you wish, you should have a good idea when you are likely to retire and how much you will retire on. The estimates you get for your eventual retirement income will become much more accurate at this point and, as such, it is recommended that you take your pension saving very seriously.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says: "Your health, debts, partner's circumstances, children, inheritances will all also play a part in your decision making. Use a pension calculator to get an estimate of what your retirement savings
might produce for you. This is something you should do regularly, not just when you first join a pension; once a year is probably about right for most people."
This is also a good time, if you have not already done so, to take stock of all your different pensions, both private and workplace schemes, and consolidate them into one – though not guaranteed final salary schemes. Many savers after having possibly worked at a number of different companies may have a number of dormant plans.
You can use the government's free Pension Tracing Service (gov.uk/find-lost-pension) to track any down. You can place these pensions in a self-invested personal pension (Sipp). These pension wrappers are ideal for private pension savers too, as they can access a myriad different investments under one roof.
By getting old pensions in one place, it will make it easier to plan your strategy and deal with administration. Remember, too, that the state pension will play a big part in your retirement income, so get a forecast of this at gov.uk/state-pension-statement.
After growing your pension, most likely via riskier investments during the past three decades, you do not want to see all that hard work undone if stockmarkets fall.
Your investment strategy at this stage of life, however, should very much be dictated by how you intend to draw your income in retirement.
De-risking – the process of transferring your money into lower-risk investments – is hugely important if you are planning to trade your pension in for an annuity, which will provide you with a fixed annual income for the rest of your life, as such you want to ensure that pot is as big as it can be. As Lawson points out: "It would be disastrous to see your savings fall by 20% or 30% so close to retirement, so be very aware of the investment risks you are running."
Most pensions manage this risk automatically for you. Many company pensions apply a de-risking strategy, known as 'lifestyling', which moves you out of more risky investments such as shares and into a mixture of bonds and cash in the last 15 years before retirement. The majority of funds that employ this tactic carry the lifestyle name, so check your pension statement to see if it applies to your scheme. Otherwise contact your pension provider which will confirm whether your fund is lifestyled or not.
But lifestyling is only relevant if you want to buy an annuity at retirement. If it is likely that you will draw an income – via income drawdown, where you remain partially invested, then it makes little sense to move your money into cash and gilts. You need your savings to keep growing, and because you aren't withdrawing them all at once you have more time to recoup any short-term losses.
If you are not in a lifestyle fund but want to reduce your risk, Justin Modray, founder of Candid Financial Advice, says perhaps start by switching an equal proportion every year into cash and bonds over the period of time you want to reduce risk.
He explains: "If you are currently 100% invested in stocks and wish to buy an annuity in 10 years' time, then maybe switch 10% across to safer assets each year. But remember while gilts and deemed reasonably cautious, gilt funds could still lose you money so there is no guarantee lifestyling will prevent losses."
Also consider how soon you want to finish work because if you intend to work well into your 60s, it may be more sensible to keep at least a decent proportion in high-growth investments.
Investing in your 50s
At this stage, protecting wealth, beating inflation and generating income should be your key objectives. But you can still invest in the stockmarket.
UK Equity Income funds, which invest in dividend-paying firms, that is companies that share profits with investors, are worth a look, says Haynes who tips the recently launched Woodford Equity Income fund, which is run by star fund manager Neil Woodford.
During the 25 years Woodford ran the Invesco Perpetual High Income fund, he turned a £10,000 investment into £230,000. Connolly rates the Newton Real Return fund, which he describes as a vehicle "designed to preserve capital and beat inflation". A multi-asset portfolio, it has capital across a wide range of countries and investments including shares, bonds and cash.
Find out everything you need to know about the new pension rules and how to plan ahead for the retirement you deserve with our new magazine, How to Retire in Style. The magazine is available to buy now from all leading newsagents, or can be ordered online atmoneywise.co.uk/retire
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A feature of defined contribution pension funds. As people move closer to retirement, their tolerance to risk reduces. “Lifestyling” recognises this and provides an automatic switching facility from funds with higher volatility to ones with less volatility as retirement approaches. Generally this means the pension fund manager gradually moving a client from riskier assets such as shares into corporate bonds, gilts and cash as they near retirement.
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.
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).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
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.
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.