I‘m 30 and I hear all the time that I should start a pension, but with the market falls of 12 months ago and retirement years away, I can’t see the point. Why should I?
I understand your reluctance. We’ve experienced the worst recession since the 1930s and, as a result, virtually every type of investment was knocked for six.
But the benefits of pensions are numerous and compelling. Firstly, the UK faces a rapidly ageing population and that will put enormous strain on public finances in coming decades. By the time you retire, it’s likely the State pension will be far less generous than at present, will pay out later and will be increasingly means tested. If you want to maintain a decent standard of living in retirement, you need to plan and pay for it.
Secondly, pensions are a neat way to combine saving and tax efficiency. Contributions escape tax, so a £100 contribution into a pension will only cost £80 for a basic-rate taxpayer who pays 20% income tax, or £60 for a higher-rate earner within the 40% tax band.
Thirdly, time is on your side. Don’t leave it too late or your pension could really suffer as there will be less time to pay money in and for your money to grow. Just look at the difference in the potential pension of someone starting at 20, 30 and 40, shown in the table below. Of course, the rate at which investments grow will affect your pension too, but the message is still the same – start saving as soon as you can.
Fourthly, if you pay into a work pension it may be possible your employer would also chip in – if this is the case, if you pass it up you’re missing out on free money.
The final point is that stock markets have been the best long-term investment over most spells in the past century. Yes, there were large falls up to a year ago but the markets have picked up since then and ups and downs should be safely ironed out over the 35 years that you would be saving. If holding shares keeps you awake at night, you can still take advantage of having a pension, but opt to invest in lower risk – and lower return – assets such as bonds and gilts.
There are two types of work scheme. The most common type is known as defined contribution where your regular savings are invested in funds. The eventual payout depends on the performance of those funds. Employers often chip in, typically the equivalent of 4% or 5% of your salary. Some schemes abide by low charges and certain other rules which earns them the stamp of ‘stakeholder’.
The second type of scheme is called defined benefit or ‘final salary’. As the title suggests, the payout is based on your pay so you don’t have to worry about how the pension performs. These schemes are extremely costly to run so you’re unlikely to be offered one. Many companies are closing them down, although they remain common in public sector jobs.
Ask your employer which scheme, if any, it has available and strongly consider asking to be signed up. It’s possible that, from 2012, this will be done automatically leaving it to individuals to actively opt out.
These are an option for those with no work scheme or for the self-employed. Some people also run them alongside existing work schemes to boost their retirement and transfer in company pensions if they move job. You should take independent financial advice before considering any transfer.
These operate in the same way as the defined contribution pensions mentioned before with ‘stakeholder’ options available again.
An option popular with financially-savvy investors with more money to invest is the Self-Invested Personal Pension or SIPP, where the holder takes on the risk of picking the right investments.
|Age pension started||Monthly payment||Likely pension
(based on 5% growth)*
(based on 7% growth)*
* Growth assumptions are after charges and assume pension is for a man aged 65.
How do the government proposals to scrap compulsory retirement at 65 affect my saving for retirement? I'm 48.
It may not seem like it, but this is good news: changes that boost employment opportunities for pensioners should be welcomed. You will have the chance to work for longer and will therefore need only a smaller pension to maintain your standard of living.
Nothing has been decided but the Government, spooked by Britain’s ageing population, has bought forward a review from 2011 to this year. It’s widely expected that current rules that allow employers to force workers to retire at age 65 without a pay-off will be scrapped. Not all companies, though, are so draconian: more than 1.3 million pensioners still work – around 11% of the total – with the figure rising rapidly as the full potential of the ‘grey workforce’ is steadily appreciated.
If you choose to work on, you won’t be able to claim a state pension until you retire, but you will continue to pay National Insurance (NI), helping to build up a better state pension when you do retire. 30 years of NI contributions are needed to qualify for a full pension.
The changes to the compulsory pension age should not be confused with the State pension age. This will increase gradually from 60 to 65 for women between 2010 and 2020. After then, for men and women born between 1960 and 1968 it will be 66; born between 1969 and 1977, 67; and born in 1978 and after, 68 – although I suspect future governments may be forced to hike these retirement ages further. As you were born in 1961, your State pension age will be 66. Neither of these changes significantly alters the advice you should have already received – save as much as you can afford for your retirement, as early as possible.
I've heard that ISA allowances have recently increased – is this correct?
ISA allowance thresholds are increasing from £7,200 to £10,200, but it depends on your age whether you can take advantage of this yet. If you were born on or before 5 April 1960, your limit increased on 6 October 2009, so you’re already able to invest more. If you were born after that date, you’ll have to wait until the beginning of the new tax year, 6 April 2010, for your limit to increase.
ISAs are the Government's way of encouraging us to save, by allowing us to grow our savings without paying tax on returns. A threshold is imposed on the amount we can save because they're such a good deal. The increase that’s currently being phased in is only the second since ISAs were introduced 11 years ago and has been eagerly anticipated by many savers. If you’re in the older age bracket, you could take advantage of the higher limit before the current tax year ends this April by investing your full £10,200 allowance.
A few years after graduating I now have enough savings to pay off my student loan in full. Should I do so?
Many graduates take a decade-plus to reach the position you’re in – so congratulations, you’re top of the class. However, clearing the debt may be rash.
Student loans were launched in 1990. I was among the first wave of cash-strapped undergraduates eager to sign up. I borrowed the maximum, around £2,300, which is nothing compared with the £30,000-plus it’s possible to rack up today. Like you, I had enough money to clear the loan early – but I didn’t. Why? Because a student loan is the cheapest long-term debt you will ever be offered. In fact, the rate for some this year is so good, it will actually shrink their debt.
Before making a choice, you need to understand how interest is calculated. Loan rates are linked to official inflation figures by the Student Loans Company (SLC), the body set up to run the system, so that the debt doesn't grow in real terms.
The system is split into...
Loans taken before September 1998
Pre-’98 loans are linked to the Retail Prices Index (RPI) each March, so the 3.8% rise from March 2008 set the rate for the academic year of September 2008 to August 2009. So a £10,000 loan will have £380 added. This academic year, however, loans will actually shrink because RPI edged into deflation of -0.4% in March 2009. So debt of £10,000 will have £40 sliced off by this August, reducing it to £9,960. Repayments are due once you earn 85% of the national average. The threshold is currently £25,936. Monthly direct debit payments are spread over five years.
Loans taken after September 1998
Post-’98 loans are a little more complicated. The rate is normally linked to the RPI each March, as with pre-’98 loans. But this system was designed to pass on the benefit if other lending rates plunge. So when the bank rate plus 1% is less than the usual RPI-based rate, the loan rate will then follow it, working a bit like a tracker mortgage. As the recession began to bite at the end of 2008, the base rate saw dramatic cuts. The loan rate was therefore switched from the 3.8% RPI rate to the bank rate, plus 1%. So when the UK bank rate fell to 0.5%, the loan rate became 1.5%.
For this year, RPI at -0.4% is less than the bank rate. The system gives the Government the option not to pass on falls below 0% – so for the current academic year, these loans will not shrink by 0.4%, as with pre-’98 loans, but remain static with a 0% rate.
Repayment on post-’98 loans is also different: you repay 9% of everything you earn above £15,000 a year. So the more you earn, the quicker you repay. A graduate on £25,000 a year would repay 9% of £10,000 (£25,000 minus £15,000) – ie £900 a year, or £75 a month.
Repayments are collected from your earnings by the taxman. Credit rating agencies don’t hold information on post-’98 loans so there is no credit score boost from early repayment for you. They do hold data on pre-’98 loans, though, and since April 2009 the SLC tells them when borrowers default on repayments.
Your prudence has put you in a strong position and you should leverage that advantage. Sit on the savings in a top-rate account. You make a bit of money each month and continue to have a handy savings pot – it may be invaluable as a deposit if you decide to buy a house, for example. That said, your financial sense and responsibility impresses me at a time when it emerges so many others have had none. A willingness to want to repay debts early should always be applauded. If you want to repay, don’t let me stop you. For more information go to direct.gov.uk/studentfinance
Andrew Oxlade is editor of the financial website thisismoney.co.uk, a columnist for the Mail on Sunday and personal financial expert for ITV’s This Morning.
If you have a general financial query or dilemma unrelated to a specific financial services provider, email Andrew at firstname.lastname@example.org.
Andrew regrets that he cannot answer your questions individually. These are his personal view and not those of Virgin Money. Nothing in the article constitutes legal, financial or other professional advice.
If you have a specific financial concern, you should always seek your own professional financial advice. All details given are correct as of 7 January 2010.