With life expectancy rising, most of us are going to live more of our years in retirement, but how will we pay for that?
“It is essential that you plan for your retirement as soon as possible to make sure you can have enough money to live on,” says Daniel James, director of client services at Lloyd & Whyte chartered financial planners, which advises members of the Pharmacists’ Defence Association. “The new flat-rate pension will be at least £148.40 per week, so if you are going to rely on this as your main income, you might not live the dream.”
So how can you work out how much is enough, and when should you start saving?
“Retirement is expensive,” says Tom McPhail, head of pensions research at investment and financial-planning company Hargreaves Lansdown. “To provide an inflation-proof income in retirement you need to think in terms of an income yield of around 4%. So if, for example, you want an income of £10,000 a year, you’ll need a fund of around £250,000. Unless you are in a position to save very large amounts of money, that means starting early.”
What are your options?
It’s never too early to start saving for retirement. As Alan Higham, retirement director at Fidelity Worldwide Investment, points out, “the sooner you start, the sooner you can afford to retire”.
This may appear obvious, but the tricky part can be deciding what kind of savings plan to choose. “The main thing is to do something,” says McPhail, “whether it is investing in property, saving in an Individual Savings Account (ISA), or joining a pension fund.”
Joining a pension scheme is the most tax-efficient way to save for retirement because you benefit from tax relief on contributions as you do not pay tax on money going into your savings. However, Higham warns: “The drawback is that you must lock the money away until the minimum pension age — currently age 55, but set to rise to age 57 by 2028 — and there are limits on the maximum you can pay into a pension each year and how much you can build up in a pension over your lifetime.”
At the moment, most pension funds pay out as an annuity, which means that those who retire receive a fixed amount of money per year. However, in April 2015, new rules will allow retirees to withdraw their cash as a lump sum in certain circumstances (see ‘What you need to know about the new pension freedom rules’).
If you want to save more on top, then an ISA is a good alternative — you can currently save up to £15,000 a year. You will have already paid tax on your income before you pay into your ISA, but your investments are then largely tax free, and you can take your money out tax free too.
“An ISA may also suit younger savers who can’t be sure that they won’t need access to these savings before their minimum retirement age,” adds Higham. “Whilst they are less tax-efficient than a pension, they are the best option for those who aren’t prepared to lock their money away.”
Some investors might also consider a mix of stocks and shares, property and bonds, which, Higham says, “over the longer term are likely, but not guaranteed, to deliver returns exceeding inflation”.
If you are a current business owner, or may potentially own a business later in your career, it is also worth remembering that your pension fund can be used as part of your business planning, according to Paul Hamilton, operations director at Smith Cooper Independent Financial Solutions. “For example, self-invested personal pensions allow you to purchase commercial property, so your pension scheme could purchase a shop or shops and then rent the property to your business,” he explains.
This option is flexible — the value of your pension fund can be used to buy property in part or in full, and you can do so in conjunction with other people, Hamilton explains. Additionally, if required, you can borrow extra money from your pension scheme within certain limits. “This route retains all of the tax advantages of a pension fund, including protection for your family should you die before retirement,” says Hamilton.
Employers are required to set up and contribute to a pension scheme for all staff who earn more than £10,000 a year. Joining your workplace pension is “a no-brainer because of the upfront tax relief and the employer contribution — effectively, you are doubling your money every time you make a contribution,” says McPhail.
“If your employer offers good pensions — as many in the pharma industry do — then you may find it pays 80% of the total cost each year, leaving you to pay just 20%,” says Higham. “Opting out of the pension at an early age, perhaps to pay off debt or to save for a deposit to buy a house, is a false economy when it means you lose substantial employer contributions.”
If you are eligible to join the NHS Pension Scheme (NHSPS) then McPhail believes it offers “generous guarantees” and “there is no obvious reason not to join”.
However, it is important to remember that the new ‘pension freedom’ that the government is introducing from this April does not apply to members of the NHSPS. Lyndsay Ashton of the NHS Business Services Authority’s customer insight and communications team explains: “A pharmacist employed by an ‘employing authority’ (an NHS hospital trust) is afforded access to the NHSPS. The government is introducing legislation whereby individuals with private defined contribution ‘pension pots’ may now elect to take the full amount in their pot as a one-off taxable lump sum, rather than as an annuity, [but] this does not apply to the NHSPS (or other public-sector pension schemes) where the maximum annual pension a person can commute to a tax-free lump sum is limited by HM Revenue and Customs (HMRC).”
Despite this, Hamilton maintains that the NHSPS remains one of the “most valuable and highly regarded pension schemes” in the UK, to the extent that he advises: “If you are of a certain age and income you will now be automatically enrolled into the scheme, but if you don’t meet the criteria [for auto-enrolment] and have the option to participate, then you should. There are new flexibilities in the scheme, which now mean that retirement is no longer a cliff-edge decision at a certain age — you can gradually reduce your hours under the ‘wind down’ provisions, there is the ‘step down’ option, or the ‘retire and return’ to work option that may be appealing.”
Mr A is a 70-year-old independent pharmacist from Middlesex who is still working but has plans in place for when he retires:
“From as early as I could afford, I started making investments — firstly small shares, then a pension and then property. I had a family member who was a bank manager and had invested in some shares, and he gave me a good insight. Other than that, it was just having the dream of owning my own property, and then once I did, one became two.
“However, I didn’t start until I was in my early 40s. I came to this country with nothing after having to leave Uganda. I studied here, got my degree and worked for little to nothing for years until we could have a place of our own. It took a while to save up the initial deposit, but once we did we were set on our way.
“I am 70 and have planned to retire for a while but can’t seem to fully! Most independent pharmacists I know have a great work ethic — they believe in their businesses and have made good decisions for planning for retirement. I would speak to a financial adviser about where savings are best placed [and] look into the new pensioner bonds that have just been introduced.”
Selling your pharmacy
If planning for retirement means selling your pharmacy, Natalie Floyde, financial controller at the National Pharmacy Association, has the following advice:
1. Get specialist financial advice — this is not just about the financial outcome itself, but also about reducing your stress while preparing for retirement.
2. Review the contractual position of the pharmacy business thoroughly, from property leases to insurance. ‘Claims occurring’ insurance can be an attractive selling point if you are selling your pharmacy, because it means you are covered if a claim is made after retirement, so the new owner will not have to factor in this risk.
3. Give yourself plenty of time — there is a lot to do! Not least is to get your paperwork in order, which includes up-to-date accounts for three years, at least 12 months of NHS statements and VAT returns.
Start planning now
As with any kind of investment, no returns are guaranteed, and you need to be actively involved with what you have chosen to avoid future pitfalls. As James points out: “Don’t start a pension and never look at it again. Opportunities come and go all the time, so plan, review and adjust it to meet your demands and needs, to be sure you are in the best place you can possibly be.”
A decent pension does not happen by accident, so take an interest in how much you are saving, where your money is invested, and get as much advice as you can about how to plan a comfortable retirement before it is too late.
Pick a pension
Final-salary pension schemes (such as the NHS pension scheme)
These schemes usually work on the basis of the number of years you have worked divided by a factor (usually 80 or 60) multiplied by the salary on which you finish your career. For example, Claire worked for the NHS from aged 25 until she was 63, a total of 38 years. When she retired her salary was £40,000. Her pension income will be calculated as 38/80 Ã— £40,000 = £19,000 per annum pension income.
What you pay into a final-salary pension does not relate to the amount of income you receive at retirement. Final-salary pensions are seen as the best available, because the amount of income you will receive is not linked to investment performance and is therefore a known benefit.
Pension schemes are used for retirement funds because they attract tax relief — 20% of tax is reclaimed by your pension provider and added to your pension. If £125 is invested on your behalf, 20% of this is covered by reclaimed tax, so your actual payment contribution would be £100.
Also, if you are a higher-rate or additional-rate tax payer, you can claim the additional level of tax back against your tax return. Therefore, in addition to the £25 added to your pension fund, you can reduce your tax bill by £25 for each contribution that you make, on the basis of paying £100 into your pension.
The money that you put into a pension is then invested to try and get it to grow. There are lots of different opportunities available for this, and it is important that you understand the risks involved with the investments made, as well as the benefits that they might offer.
When you retire, you have a pension plan with a value. The bigger the value, the more income you can get. In fact, 25% of the fund can be accessed free of tax, while the remainder will be taxed as income as you take it out of your pension. Traditionally, people were encouraged to buy an annuity, because this would provide them with a guaranteed income for the remainder of their lives. However, recent legislation changes mean that you can access your money in a number of different ways that provide you with far greater flexibility and choice than ever before, via the new pension freedoms (see ‘What you need to know about the new pension freedom rules’).
By the end of 2017, all employers are required to offer employees a pension scheme into which both parties will contribute. This will work in a similar way to a personal pension.
While making people join a pension scheme is a positive step, many of the schemes have limitations, such as when and how you can withdraw your money. It is important to understand the value that you will get from your workplace pension and whether it is worthwhile doing something else in addition to this.
Source: Lloyd & Whyte chartered financial planners
What you need to know about the new pension freedom rules
New pension freedom legislation comes into effect from 6 April 2015, allowing anyone over 55 years of age to access their pension.
1. You have no right to insist on pension freedom. Your pension scheme or company does not have to offer you full pension freedom. It can stick to the original deal of offering you an annuity, so you may have to move pension schemes to access new freedoms.
2. Members of public-service pension schemes cannot access pension freedom. NHS staff, civil-service workers, firemen, policemen, members of the armed forces and teachers are not allowed to give up their pension to get a lump sum to spend as they please. Local-government workers and members of private-sector schemes can, but they will be forced to pay for independent advice on the transfer before it can go ahead (unless the value is less than £30,000).
3. Pension income is taxable. Most people can take 25% of the fund as a tax-free payment, but the rest is subject to income tax along with all other income. So, if you withdraw £40,000, then £10,000 could be tax free, but £30,000 would be added to any salary earned that year. Someone on a £20,000 salary would then have £50,000 total taxable income and would pay higher-rate tax on some of the money. Your pension provider will deduct tax for you, but it may not be the correct amount, leaving you to deal with HMRC to correct the amount.
4. Pension funds can be passed on to your family without inheritance tax. You need to tell your pension company who you want to benefit because they will not just follow your will. If you die before the age of 75 then your family or beneficiaries can take the money tax free. If you die after the age of 75 then your family or beneficiaries will pay tax on any withdrawals they make from the pension fund at their normal income-tax rates (as in point 3 — the amount drawn is added to the taxable income they have).
5. You will receive free guidance to help you make the decision. This is provided over the telephone by the Pensions Advisory Service or in person through the Citizens Advice Bureau network. Expect to do some homework on what pensions you have, and what you need to fund your lifestyle in retirement, ahead of a 45-minute call or session to discuss the options open to you. You will not be told what is best for you. You must decide for yourself and accept full responsibility (with no comeback if you make a mistake), or seek the advice of a paid financial adviser, who would then be responsible for recommending the right solution (with comeback if they make a mistake).
6. Moving pension funds is tricky. As noted, you may need to move pension funds to get access to the new freedoms, but your current pension scheme may have valuable benefits that would be lost on transfer, such as:
- a bigger tax-free sum; schemes set up before 2006 may have an entitlement of more than 25% of the fund as a tax-free cash sum
- guaranteed annuity terms; schemes set up in the 1990s or before may pay a much higher guaranteed income than is currently on offer today. Annuity rates of more than 50% above current market rates could be available.
Check the terms of your policy for any hidden benefits, as well as any penalties that might apply on moving your fund.
7. You do not have to take your pension at normal retirement age. Your pension may say it is due to pay out at the age of 65, but you do not have to take it if you do not want to, for example if you are still working. Do make sure that you understand what is available — particularly because a small number of funds will pay more at age 65 than they might pay only a few months or a year later.
8. Your state pension might be different from what you think. If you reach state pension age after 6 April 2016, it is worth checking now with the Department for Work and Pensions what you can expect before you decide how to spend any private pension in April 2016. Do not spend your private pension now thinking that your state pension is bigger than it really is.
9. You will have a reduced pension contribution limit once you access your pension flexibly. Currently, the maximum you can put into a pension scheme is £40,000 each year, with the ability to carry forward three years of unused allowance; that falls to £10,000 with no carry forward. The only way to avoid that is to buy a guaranteed lifetime annuity with no flexibility so you receive a fixed amount each month.
10. You must report accessing your pension flexibly to all your other pension providers. Once you access your pension flexibly, your pension provider must confirm this to you within 31 days and notify you of your reduced allowance to make further pension contributions (see 9 above). You then have 31 days to tell all your other pension schemes or face a fine of £300 plus £60 for each day that you are late in doing so.
11. Not everyone can access their pension at the age of 55. In 2026–2028, the state pension age will make a gradual change from age 66 to age 67. When this is complete, the minimum pension age will rise to age 57 and will increase as state pension age increases. The detail is not yet known, but certainly people under age 43 now are going to have to wait until age 57 at the earliest.
Source: Fidelity Worldwide Investment