There is no way to dress up pensions, let’s face it – it’s not a sexy topic! But none the less we all need to get to grips with the new pension rules and what they mean for our financial future. So we try to sort some of the facts from fiction that have been reported so far.
• Many people believe that everyone reaching retirement age from 2016 will automatically get the £155 pension. In fact you will need to have 35 qualifying years (up from 30), and people that have contracted out during their lifetime by saving in to final salary schemes will get less. The good news is that as I write this the Government is putting the final touches on an intelligent calculator that will be able to forecast your future pension : https://www.gov.uk/state-pension-statement
• Annuities have garnered a bad reputation of late, not least because of poor performance during the recession, with low interest rates playing a huge role. But for some people they will still be the right choice to provide a guaranteed income throughout retirement – so do your homework. Rules that come in to play during April 2015 will mean we have more choice, especially regarding small pots of money. If your various pensions add up to less that £30k (previously £18,000), then you will be able to take it all as a lump sum and invest as you please. This still needs serious thought as only the first 25% will be tax free.
• There has been a lot of talk about free financial advice from April 2015, but remember there is a lot of difference between guidance and advice. Many companies will begin to offer online tools for financial planning. In reality you can rarely beat face to face advice. It may pay to budget for around £450 for advice – this would pay for a good 3 hour appointment with a specialist who could truly advise on what’s best for you. Try a website like www.unbiased.co.uk to find an Independent Financial Advisor.
• Auto-enrolment will not solve all of our pension’s woes. Employers have been working on enrolling staff in to company pension schemes. But there are people that slip through the net – those earning less that £10,000, self-employed, or those that work for small companies that have not yet had to start a scheme. Contributions will rise by 2018 – employees will pay 4%, employers will pay 3%, 1% will be tax relief (at 20%), but even this might not be enough to secure your future – depending on your age and any other long-term saving plans you have in place. Wherever possible – top up your scheme.
• If you are married – make sure you both pension plan. Many people have got caught out when the husband has bought a single life annuity – because it provides a higher income, only to find out the pension plan dies with them, often leaving the widow in financial dire straits.
• If you are in position of not needing your pension straight away, then you can defer payments. From April 2016 deferment will not be as generous – 1% for every 10 weeks (currently 1% for every 5 weeks). Whilst not as generous if you are still employed and especially if you are a 40% tax payer – then this may be a good option.
Many of us have dreams of what our retirement might look like, to put things in to perspective. To retire on an income of £1,000 a month – you would need to have a pot of £231,500 at current annuity rates!