10 tips improving pension

8/13/2019 10 Tips Improving Pension

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Top 10 tipsto improving your pension> Why consolidating pensions often makes sense> How you can reap rewards when you keep an eye on your pension investments> Why it pays to shop around at retirement

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1

Have you ever planted

anything in your

garden?

If so you probably kept an eye on its

growth, watered it and dug out the

occasional weeds that threatened to

smother it. Had you walked away andcome back many years later, you

wouldnt be too surprised to find it

wasnt faring too well. But that is

exactly how millions of people treat one

of their most important assets their

pension. They take the important first

step of setting up a pension, but then

fail to follow this up by making sure

their pension is prospering.

Over 16 million people have NEVER

reviewed their pension plan, according

to research conducted by Barings. This

will not affect their daily lives while

they are still at work, but it could have

serious implications for their comfort in

retirement. It is already too late to do

very much about it if you look insideyour pension for the first time when you

retire. If it wont buy you the income you

expected you have two pretty

unpalatable options: work for longer

or simply accept a lower income for

the rest of your life.

By keeping a regular eye on your

pension you can help to ensure that it isstill on course to provide you with the

income you need. We would suggest you

review your pension at least once a year.

It will probably be helpful when you do

so to use a pension calculator; one is

available on our website at

www.hl.co.uk.

You can use this tool to estimate the

income you could receive in retirement,based on the value of the personal

pensions you have built up so far and

the contributions you are making. You

are then forewarned about any shortfall

in your plans and can take action to

help plug the gap, perhaps by

increasing your contributions, moving

to a better fund or seeking a lower cost

pension. When it comes to retirementplanning forewarned is very much

forearmed and regular attention to your

pension will give you a better chance of

living through retirement with an ample

income.

Review your pension regularly

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Top10Tips

Your pension will contain

at least one investment.

Usually this will be a

managed fund of some

description. Often this managed fund

will be run by the pension provider,

usually an insurance company.

Insurance companies are very good atmeasuring and analysing risk, but may

not specialise in investments.

But the performance of your pension

fund can make a huge difference to

your comfort in retirement. Here is

what a 10,000 pension pot could be

worth after 30 years depending on the

growth your fund achieves.

Clearly there is a lot at stake here, yet

this is an issue which is neglected by

most pension investors. Dont be one of

them. Monitor your pension

investments regularly to make sure they

are up to scratch. If necessary you can

switch your pension into a fund with

better prospects. This may be possible

within the pension you already have,depending on the funds available.

Otherwise it is possible to transfer your

pension to a new pension provider with

a better range of funds.

Past performance is not a guide to

future returns, so it can be difficult to

pick out funds which will perform well

in the future. To help those who want tochoose their own funds we publish the

Wealth 150, our list of favourite funds

across all the major sectors. This is

compiled by our Head of Research Mark

Dampier and his team, who conduct

hundreds of fund manager interviews

every year to try to pick out tomorrows

winners. If you would like a copy

please go to our website atwww.hl.co.uk or call our Pensions

Helpdesk on 0117 980 9926.

2

3

Monitor your pension investments

Importance of fund performance

% % % %

Annual fund growth

,

,

,

,

This is just an example to illustrate the importance of

investment performance. In reality investments rise as

well as fall in value so you could get back less than youinvest. 1.5% annual charge assumed. Inflation will

reduce the value of money over time.

Pensio

nv

alue


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3

Almost every week in the

financial press you will

find a story about someone

who has been paying into a

pension for twenty years or more, only

to find that at the end of the day they

have less than the money they put in.

One reason for this has already beencovered: investment performance will

vary depending on the fund. However,

another common reason is that high

charges have eaten into the value of

their pension fund.

Pensions in general now have lower

costs than was previously the case.

However many people still have olderpension contracts that were set up in

the 1980s, 1990s and early 2000s. In

those days charges were often much

higher, and those who set up their plans

back then may still be paying more than

they should for their pension. It would

not be unusual for an older pension

contract to take a fixed monthly fee or a

percentage of your monthly

contributions as a charge before

investing them. The investmentsthemselves could carry a percentage

charge as well. On top of that you

would probably pay an annual

management fee.

Happily, things have changed. You can

now set up a pension without paying

any initial charge. You will still pay an

annual management charge.

4

Beware of high charges

Top10Tips


5/16

It can be difficult to keep

an eye on how your

pensions are doing if they

are split up among

different companies. Many of us

accumulate pensions through the

workplace, and through changing jobs

we leave behind a trail of separatepension pots. You may find these easier

to manage if you consolidate them. You

can do this by transferring them to a

Stakeholder, Personal Pension or SIPP

(Self Invested Personal Pension). If you

are happy to take control of your

investment decisions you could choose a

SIPP. You can also have the added

benefit of online access to your pension,so you can monitor it and make changes

as often as you want at the click of a

button.

There are some pensions that it may not

be wise to transfer. For instance final

salary schemes carry valuable

guarantees which you should not give

up without good reason. Sometimes

other pension schemes can have

guarantees attached, perhaps in the

form of the annuity rate that will be usedto convert your pension pot to an income

at retirement, or perhaps in the form of

the growth that your pension fund will

enjoy. If you and your employer are

paying into a current workplace scheme

then it normally makes sense for that to

remain where it is too, otherwise you

may lose out on employer contributions.

Before transferring you should alwayscheck you will not lose any valuable

benefits, guarantees or incur excessive

exit fees.

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5

Consolidate pensions

Top10Tips


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5

You might think joining your

work pension scheme is

enough to provide you with

a comfortable retirement. If

this is a final salary scheme and you stay

in that employment for most of your

working life, then you may be right.

However very few people outside thepublic sector are now offered a final

salary scheme. In fact many existing

schemes are closing down.

Most people nowadays are typically

offered membership of what is called a

defined contribution (also known as

money purchase) pension. Unlike a

final salary scheme the employer doesnot promise an income you will receive

at retirement. Instead both you and

your employer will pay an agreed

contribution and your retirement

income will depend on the value of

your invested pot and annuity rates

when you retire (see page 14). While

this is an excellent start to pension

saving it is unlikely to be all you needto do to secure a comfortable

retirement. In many cases it will

therefore make sense to top up by

making additional pension

contributions.

Many people start pension saving later

in life, and even then may have periods

when they dont contribute to apension. Consequently it often makes

sense to top up your pension provision

whenever possible. This could be a

lump sum contribution as a result of a

bonus for instance, or perhaps as a

regular contribution if you have room

in your monthly budget for additional

retirement savings. Remember, once

you have put money in a pension you

cannot normally access it until age 55 atthe earliest when you can normally

take up to 25% as a tax free lump sum

and a taxable income from the rest.

You can usually make additional

savings into your existing workplace

pension scheme. Alternatively if you

want greater investment freedom you

might consider topping up a SIPP (SelfInvested Personal Pension). If you are a

member of a final salary scheme you

may be able to pay money to build up

an additional pension pot or to buy

added years to give you more income

from your pension. If these options are

available to you they are definitely

worth considering.

To determine how much you should

add to your pension, a useful exercise

is to use a pension calculator. You can

plug in the pension savings you already

have and how much you and your

employer are currently contributing.

The calculator will then project how

much income you might be on course

to get in retirement. You can then use itto work out how much more you might

need to put in to achieve your target

6

Top up

Top10Tips


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The money you put into a

pension will almost

certainly be invested and

therefore subject to

investment risk.

Why take any risk at all, you might ask.

The reason is that risk and reward arerelated; the greater the risk of loss you

take on the greater the return you

should expect for doing so.

If you are very averse to investment risk

you can usually choose to invest your

pension contributions into a very low

risk fund, for instance a fund that

invests in cash deposits only. However,as a result over the long term you could

receive lower returns. Indeed, there is a

risk that the interest earned on your

cash may not even keep pace with

inflation, in which case the savings you

are making would actually be losing

their buying power. This is why most

pension investors invest in a managed

fund which invests in stocks andshares. They have historically

performed better than cash over the

long term, although there are no

guarantees this will continue.

Furthermore the value of stock market

investments can fall as well as rise. So

you could get back less than you invest.

When you are choosing investments

within your pension, it might well payto spread your investments around to

reduce the risk you face from poor

returns in any one sector or indeed

from any one fund. For instance,

investing in just one UK growth fund

means that if that particular sector does

badly your entire pension fund will

suffer. Likewise by investing in just one

fund in that sector you run the risk thatthe manager performs poorly.

You can address this problem to some

extent by investing in a number of

funds. Depending on your attitude to

risk this could be anything from cash

funds through to emerging markets

funds. Generally speaking the closer

you are to retirement, the smaller yourappetite should be for investment risk.

For instance with 30 years until you

6

7

Manage your investment risk

Top10Tips

income. It is a good idea to do this on

an annual basis as investment returns

will vary from assumed growth rates. A

pension calculator is available on the

pensions section of our website at

www.hl.co.uk.


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6draw on your fund you have a long time

over which to ride out the ups and

downs of the stock market. You also

have a longer time to rebuild your

portfolio if you do suffer investmentlosses. With, for instance, three years to

go until retirement the situation is

much different because if you sustain

losses there is less time for you to make

good that shortfall.

In the run up to retirement it is

important therefore to normally move

from riskier to safer assets. Some fundsdo this automatically for you. These are

called lifestyle funds and will

gradually move out of equities and into

bonds and cash. The process normally

starts either 5 or 10 years before your

stated retirement date.

Lifestyling is a sensible option for those

with little or no interest in where theirpension is invested. However, there are

two main problems. The first is you

may not have a fixed retirement date in

mind; perhaps you will want to retire

sooner or later than the deadline to

which your lifestyle fund is running.

The second is the switching programmeis automatic and consequently your

fund could be selling out of shares at

exactly the wrong time. For instance

there will be some lifestyle funds that

sold out of equities at the bottom of the

market in March 2009, simply because

they were programmed to do so.

Most pension providers will inform youwhen the lifestyling process is due to

start. This enables those who are

willing to take control of their pension

investments to take an active approach

to the de-risking process.

That way you can make adjustments to

your strategy if your retirement date

moves, as well as taking an intelligentapproach to the precise points at which

you sell out of certain funds.

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Top10Tips


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Investing in a pension for a

non-working spouse not

only is one of the most tax-

efficient ways to save, it may

also provide additional tax-free income

in retirement.

Everyone can receive a certain amountof income tax free, before starting to pay

tax. This is known as the personal

allowance and is currently 9,440. Those

born before 6 April 1948 may have a

higher personal allowance. This means

there is a potential for a tax-free income

of 18,880 per couple. One of the best

ways to make use of both your tax-free

allowances is with pension income.Current rules allow pension savers to

take a lump sum from their pension

usually up to 25% completely tax free,

and a taxable income from the rest.

It therefore makes sense to save into

pensions in both your names even if

one of you does not work.

This will help to use both of your

personal allowances when you take

retirement incomes and potentially

boost the amount of tax-free income

you receive as a couple.

This type of planning could be

especially helpful if either of you were

born before 6 April 1948 and have anincome of more than 26,100. For every

2 of income above that, you lose 1 of

your personal allowance until it reaches

the standard personal allowance.

Below is an example, based on a couple

with a joint retirement income of

40,000 a year. The income they receive

after tax will depend on how this40,000 is split between them.

If they maximise tax efficiencies, they

could receive 1,312 extra a year.

7

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Top10Tips

Dont forget your spouse

Gross incomePersonal tax-freeallowance

Taxable incomeTax (20%)Post tax incomeTotal as a couple ,

Person A

,,

,,

,

Example 1: no tax planning

Couples income = ,

Person B

,,

,

Gross incomePersonal tax-freeallowanceTaxable income

Tax (20%)

Post tax incomeTotal as a couple ,

Person A

,,

,

,

,

Example 2: tax planningCouples income = ,

Person B

,,

,

,

,


10/16

7One situation where it might make

sense to be selfish with pension

contributions, though, is if you qualify

for higher-rate tax relief and your

spouse does not.

Please note tax rules can change and

the benefits depend on your

circumstances. It is also worth bearing

in mind you may have additional

sources of income, which you will need

to take into account.

For instance, both you and your spousewill probably have some entitlement to

a state pension (you can find out

roughly what to expect at www.gov.uk).

10

Top10Tips


11/16

It might sound like a painful

experience, but a salary sacrifice or a

bonus sacrifice arrangement is

probably the most efficient way of

contributing to your pension. Such an

arrangement involves giving up some of

your salary in exchange for a pension

contribution from your employer. Indoing so you pay a reduced amount of

income tax and in addition to this both

you and your employer make a

National Insurance saving.

Where such arrangements exist, the

employer can give up some or all of the

saving they make to you, by paying it

into your pension.

For example, assuming a higher rate

taxpayer receives a 10,000 bonus from

their employer, using salary sacrifice

can mean the difference between

receiving 11,380 in their pension or

just 5,800 in cash*.

Thats a pretty attractive proposition ifyou can get it and are happy for the

money to be tied up until your

retirement. The only tricky bit might be

getting your employer to adopt such an

arrangement and nominating a pension

into which the payment is to be made.

If you are due a bonus or want to know

more about your companys policy on

salary sacrifice, it may be worthspeaking to your Human Resources

Manager or Financial Manager.

There are some potential drawbacks to

entering into a salary sacrifice

arrangement which need to be

considered.

For instance, you may face a reduction

in your contractual entitlement to sick

pay, overtime rates and paternity andmaternity pay, though most of these

issues can be overcome by your

employer maintaining a reference

salary on which these benefits are

based. However, because you are

paying less National Insurance you

may find that your entitlement to

certain state benefits or statutory

entitlements is reduced. Your reducedsalary may also affect the amount of

money mortgage lenders are willing to

loan to you.

*The example assumes a 40% taxpayerand a 13.8% employer National

Insurance saving paid into your pension.

8

11

Top10Tips

Sacrifice salary


12/16

12

Is it better to save for retirement into a

pension or a Stocks & Shares ISA? This is a

question many people ask because both

tax shelters enjoy a generous tax

treatment, though the pension is generally

considered more tax efficient, particularly

for higher rate taxpayers. Workplace

pensions often come with a valuableemployer contribution too. However ISAs

have attractive features, in particular the

flexibility of drawing on them if the need

arises. Importantly when saving for

retirement you do not have to choose either

a pension or an ISA, you can invest in both.

Indeed many people like to complement

their pension savings using Stocks &

Shares ISAs to reap the benefits of both taxshelters. Here is a rundown of the main

features of both. Please note tax benefits

depend on your circumstances and can be

changed by the government.

Top10Tips

Consider ISAs

Product feature

Maximum annual contribution

Minimum age to invest

Maximum age to invest

Tax relief on contributions?

Tax relief on investments

Minimum age for withdrawals

Withdrawals

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13

Top10Tips

Personal Pension, including SIPPs

You can normally contribute and get tax relief on as much as youearn each tax year, broadly subject to a 50,000 annual limit

(reducing to 40,000 in 2014/15). Non-earners can pay in up to3,600 and receive tax relief.

Stocks & Shares ISA

11,520

From birth 18 (from birth for Junior ISAs)

Tax relief not available after 75 No maximum age

Yes. 20% for basic rate and non-taxpayers. Up to 40% for higherrate taxpayers and up to 45% for top rate tax payers.

No

Yes, there is no UK capital gains tax or furtherincome tax to pay.

Yes, there is no UK capital gains tax or furtherincome tax to pay.

Generally 55 No

Up to 25% can be drawn as a tax-free lump sum. The remaindercan be made available to provide a taxable income.

Up to 100% can be drawn as a tax-free lumpsum, or a tax-free income can be drawn as

required.

Tax rules can change. The value of tax benefits depends on your circumstances.


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It is crucial that when you

draw your pension you

shop around for the highest

income you can get. You

could get extra income each year for the

rest of your life. It is therefore

remarkable fewer than half of people

actually take this simple step. Theprobable reason is many do not realise

they do not have to accept the

retirement income offered by their

pension provider; they are free to take

their pension pot to a different

insurance company offering them a

higher income.

This pension income provided byinsurance companies is called an

annuity. You give your pension pot to an

insurance company and in return they

pay you a secure income for the rest of

your life. This will be paid to you each

year until you die. However there can be

a big difference in the income different

insurance companies will provide and

your pension provider may be offering

you an annual income that is hundredsif not thousands of pounds short of

what you could get elsewhere.

The case for shopping around is even

more compelling if you smoke or have

any medical complaints. This is because

some insurers will offer you an

enhanced annual income because they

expect such conditions to have animpact on how long you will live and

consequently how long they have to pay

Top10Tips

10Shop around for the best

retirement income

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Top10Tips

15

your income. By shopping around and

declaring your lifestyle or medical

conditions, you could secure up to 54%

more income.

The list of medical complaints that can

qualify you for an enhanced annuity

runs to over 1,500. They includecommon conditions like high blood

pressure, high cholesterol and diabetes.

It is estimated that up to 40% of people

could qualify because of ill health or

lifestyle factors like smoking. You must

shop around to find out if you can lock

into such an enhanced rate.

The chart above gives a snapshot of thedifference in the annuities that can be

found at the time of writing.

Shopping around for an annuity is easy

using our annuity supermarket. You can

get an instant quote of the best rates

either by telephone on 0117 980 9940

or online at www.hl.co.uk/annuity. As

well as searching for the best rates we

can provide you with live quotations for

enhanced annuities, annuities thatkeep pace with inflation and annuities

which continue to be paid to a spouse

or partner after your death.

Please note annuity rates are subject to

change. Once set up an annuity cannot

be changed.

1,7

02. 80

1,484.40

1,458.48

1,251.00

1,935.36

1,852.92

1

,719.36

1,7

01.12

1,440.84

1,000

1,250

1,500

1,750

Grossincomeperannum

54.7%

More

48.1%

More

37.4%

More

36.1%

More

36.0%

More

16.6%

More

18.7%

More

15.2%

More

2,000

Lowesthealthy

liferate

Highesthealthy

liferate

Highblood

pressureand

highcholesterol

Smoker

Stroke

Pancreaticcancer

(withradiotherapy

&chemotherapy)

Angina

Diabetes(insulin

dependent)

Heartattack

Source: HL Annuity Calculator, 25 March 2013. The information relates to a 65 year old

with a fund of 25,000 and an average rated postcode. The annuity is single life and

level, with a five year guarantee, paid monthly in arrears.


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04/13

This guide is published to help clients make their own investment decisions. It does not

constitute a personal recommendation in any way whatsoever.

All investments should be held for the long term as their value does fall as well as rise, therefore

you could get back less than you invested. Neither capital values, nor income, are guaranteed.

Past performance is not a guide to the future.

If your employer offers a pension you should consider joining or making additional contributions

to this first. Should you have any doubt as to the suitability of an investment for your

circumstances you should contact our Financial Practitioners for individual advice.

Any tax reliefs referred to are those currently applying, but levels and the basis of, as well as

reliefs from, taxation are subject to change. Their value depends on your individual

circumstances.

The information in this guide is based on our current understanding of existing and proposed

legislation as at 27 March 2013 which may be subject to change. Unless otherwise stated, tax rates

are those applicable to the 2013/14 tax year.

Important Investment Notes

Hargreaves Lansdown Asset Management Ltd, One College Square South, Anchor Road, Bristol, BS1 5HL.

Authorised and regulated by the Financial Services Authority

Enquiries: 0117 980 9926

Best SIPP Provider- Hargreaves Lansdown

2007, 2008, 2009, 2010, 2011, 2012

10 tips improving pension

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