FOOL'S EYE VIEW
Five Ways To Secure Your Retirement

By Jane Mack (TMFJane)
February 8, 2005

Did you know that the average size of a pension pot is thought to be around £30,000 at retirement? And do you know how much of an income that'll buy you? Approximately £30 a week!

And these are the people who've paid into a pension scheme. At the moment more than 13 million adults of working age in the UK have absolutely no pension provision whatsoever and people forget that, although we often work for 45 years, our retirement can last for as much as 20 or 30 years.

Indeed, my granddad who's 93, has been retired for 28 years now and it's only because he was parsimonious when he was earning and saved a lot that he's able to enjoy a secure retirement. (Actually, he could be far more comfortable if he chose but old habits die hard and he still doesn't like to spend his money!)

So, if you want a comfortable retirement, it's time to start saving for it now so, what's on offer?

1. Employer Pension Schemes

Generally, the only really good pension schemes are those where your employer contributes a worthwhile amount, because what you're getting is Free Money (which is always a good thing) even if you might prefer to have been given it in the form of a higher salary. And if you're a 40% taxpayer, you'll at least be getting substantial tax relief from the Government on your pension contributions now. This means that, if you end up paying the lower rate as a pensioner, you'll have got a lot more out of the Government overall than you're having to pay in income tax in your old age.

Final salary schemes are usually worth signing up for because your employer is responsible for financing your retirement. Unfortunately, such schemes have been hit badly by poor performance in the stock market and people living far longer than expected so many companies have closed their schemes to new staff and replaced them with the more common money purchase scheme. These put the onus to save on to the employee but they're still worth paying into if your employer makes a contribution too.

2. Personal Pensions

If your employer is too small to offer a pension scheme or you're self-employed, look for a personal pension scheme, preferably a Stakeholder Pension as charges are capped by the Government (currently by 1% although this will soon increase to 1.5%). These low-cost pension plans are designed to encourage the lower-paid to save for their retirement with the rules being changed to allow non-working people to contribute to pension schemes too.

With Stakeholder pensions you can stop and start your payments whenever you like, they're portable from job to job and you can switch your stakeholder to a different provider whenever you want without penalty.

3. Self-Invested Personal Pensions (SIPP)

If you prefer to manage the investments in your own pension fund - and you think you know what you're doing(!) - you could opt for the flexible SIPP. Within a SIPP you can invest in a wider range of assets than with other types of pension - most notably commercial property. From April 2006, residential property will be permitted too, something that is of great interest to landlords with a buy-to-let portfolio.

Unlike the stakeholder pension, there is no limit on the charges which a SIPP can impose so they can be expensive to run although the costs are getting cheaper as they grow in popularity. The vital point about SIPPs is that the risk is all yours. If your investments go pear-shaped you'll have no-one else to blame so be sure to consider the risks fully.

4. Individual Savings Account (ISA)

If you prefer to save within an ISA as an alternative to a pension, you don't get the tax relief on your contributions, but then neither do you pay tax on what you take out on retirement. Not only that but you will have more flexibility about how to get the best income from your pot of money knowing that what's left over can be left to the children.

Note also that, assuming you accumulate enough money, you can help yourself to it whenever you like whereas with pensions, access to your funds is not permitted until you reach 50 (55 from April 2010). ISAs, therefore, give you the advantage of being able to retire earlier.

5. Property

And finally, of course, we have property as an investment - an attractive proposition for anyone who has little faith in equity markets. However, property can be just as risky particularly if you are relying solely on rental yields to fund your retirement. If you're intending to use your own property bear in mind that you will either have to downsize or release equity via some sort of mortgage which could prove expensive and still not give you enough to live on.

Incidentally, if you already pay into a pension, the city watchdog, the Financial Services Authority, is reminding people to review whether to be contracted in or contracted out of the Second State Pension. This is a decision that can be changed at the end of each tax year and, if your circumstances have changed, it may be worth looking at it in more depth.

Everyone in employment earning above the lower earnings limit (£79 per week in 2004-05), is automatically included in the State Second Pension unless they decide to leave it ie: contract-out. If you contract-out, you give up your State Second Pension entitlement and instead build up a replacement for it in your own private pension arrangement, such as a stakeholder pension.

The advantages and disadvantages to being contracted out of State Second Pension are governed mainly by age, salary and future investment returns - the older you are the more likely it is you'd be better off being contracted in. But for more information about how the Second State Pension works, see this explanation of it.

In the meantime, remember that diversification is a major element in investing for retirement and, if you can, you'd probably be wise to invest in a pension, an ISA, property and some cash.  Whatever you decide to do, start saving now.

Check out Pensions; How to Prepare For The Pension Revolution; Don't Damage Your Extra Pension!