Whilst we might imagine our retirement to involve frequent cruise trips to the Caribbean or golf breaks in Marbella, the stark reality is that too often shoddy retirement planning means scrimping in our twilight years.
Even if pension planning isn’t completely put on the back-burner, it is often neglected to such a degree that remedial action is extremely difficult.
Martin Bamford, chartered financial planner at Informed Choice agrees that the earlier you start saving for retirement, the easier it is, but concedes that often other priorities – whether rightly or wrongly - get in the way.
An early start
“Starting early gives your money longer to grow, benefiting from compounded returns, and means you need to contribute less to your retirement pot in total in order to reach the same level of savings.
“In practice, we tend to have competing financial priorities for our money when we’re younger; paying off debts, saving for a first home and childcare are common items of large expenditure.”
He adds: “As we get older, our expenses tend to reduce and our earnings increase, creating the opportunity to maximum retirement savings later in our career. This is beneficial too, although you need to contribute more in your 50s than you would have done in your 20s or 30s to get the same results.”
Whether you are being offered your first workplace pension or looking to boost your pension pot at the eleventh hour, we look at the various options available and consider the pros and cons each.
As Patrick Connolly, certified financial planner and head of communications at IFA Chase de Vere, explains, most company schemes are good value, especially if your employer also contributes on your behalf. All employers will need to do this shortly as auto-enrolment is fully rolled out.
He insists employees should look to maximise contributions if possible. “Find out if your employer will put more money into your pension if you increase the amount you are investing and also if you can use salary sacrifice (salary exchange) where you give up part of your salary in exchange for pension contributions. This can result in tax savings for employees."
For those fortunate enough to have a final salary or defined benefit (DB) pension scheme, then in theory you should be looking at a comfortable retirement based on extended years of service.
Most DB schemes have good benefits. They can often include 50% for a spouse’s pension (upon death, either before or after your retirement date), some offer increases of up to 5% on the deferred pension until the point at which benefits were taken (to help keep the values in line with inflation), and then provide inflation proofing once in payment.
Others also have an element of death benefits in payment if the policy holder passes away within five years of receiving benefits.
Some DB scheme members may also be entitled to ‘scheme protected tax free cash’ higher than the standard 25% lump sum offered on most pensions. This benefit would likely be lost if transferred into a defined contribution (DC) pension arrangement.
If you are thinking of transferring from a DB to a DC scheme, then the best policy is to take independent financial advice.
SIPPs – a flexible friend?
The advantages of joining a company pension scheme should usually outweigh the flexibility of investing in a Self-Invested Personal Pension (SIPP). Most company schemes offer a decent range of investment options and competitive charges.
But for those who do not have a company pension, or are self-employed, the onus is on looking at personal pensions. Typically, a SIPP has more investment options (for instance individual UK and overseas shares, unlisted shares and property) and more flexibility, than a personal pension, but a SIPP will often have higher charges.
This means you need to decide whether it is sensible to pay the higher charges on a SIPP to be able to benefit from the extra flexibility and investment choices.
SIPPs tend to fall into two broad categories. The full SIPP has a very wide range of investment options but is often expensive. A so-called low-cost SIPP is essentially a personal pension with a wider range of fund or share options in which you can invest.
Connolly says: “If you’re investing in a SIPP, it is important to remember that it is simply a pension wrapper, and how your pension performs depends on how much you invest and what investments you hold within it.
“It is therefore important that you adopt a sensible investment strategy, which for many will be a diversified portfolio consisting of equities, fixed interest and commercial property, which meets their financial objectives and attitude to risk.”
If you’re investing in a SIPP and have access to a wide range of specialist investment options, this doesn’t necessarily mean you should use them. If you do then you’re likely to be taking bigger risks that may, or may not, pay off for you.
What investments should sit next to a well-funded pension?
For most people the best approach for long-term savings is a combination of pensions and ISAs. Pensions provide initial tax relief which give your savings an immediate uplift. However, they are still quite inflexible, whereas ISAs can still be tax efficient and you are able to access your money whenever you like.
Make sure you’ve got the right balance between the two to suit your requirements.
So, for instance, if you don’t think you can afford to tie up large amounts of money then it may be prudent to increase the ISA component and maybe boost pension contributions at a later point if circumstances have changed.
How important are reviews?
How important is it to keep an eye on your personal pension portfolio to ensure it remains fit for purpose?