Mon 08 February 2010
Boots has announced it plans to close its final salary pension, bad news indeed for the 15,000 employees affected. In fact they are the lucky ones; final salary schemes are a bit like giant pandas- there are sadly very few of them about and in 5 years time there probably won't be any. The closure of the Boots pension is part of a seismic shift happening in the UK: individuals are going to have to save for their own retirement as employers and the government are increasingly unable to do so. Anyone who is aware of this shift can do something about it; those who don't will spend their retired years struggling to make ends meet.
The fundamental problem is that we are all living longer. Yes, believe it or not that is a problem. This has put unbearable pressure on final salary schemes, and even the state pension is creaking under the strain. The Conservatives want to start increasing the State Pension Age from 2016 and this will probably take place if they win the election. You could well find yourself working into your 70s unless you have squirreled away a good stash of acorns to see you through your later years. The good news is that people in the UK are saving more than they have for a long while. As we entered the second half of 2009, almost 9% of our disposable income was being saved for the future. This compares with 1% just a year before. The curious thing is that this jump in saving is a direct result of the recession, which has taught us all that borrowing is bad and saving is good.
final salary schemes are a bit like giant pandas- there are sadly very few of them about and in 5 years time there probably won't be any...
On the pensions front ever increasing numbers of investors are responding to the impending pension crunch by taking control of their own financial future. They are doing this by channelling their savings into a SIPP (Self Invested Personal Pension). About half a million SIPPs have been opened over the last 10 years, and this trend shows no signs of abating. The explosive popularity of SIPPs is in part due to the shift of responsibility from employers to individuals. But it is also in part down to the dramatic fall in the cost of SIPPs themselves. What was once a top of the range pension for the very wealthy is now affordable for all investors who are happy to make their own investment decisions.
So what exactly is it that makes a SIPP such a first class opportunity? Well first of all you can get back some of the tax you have paid over the year by contributing to a SIPP. For each £1,000 you put in the government adds £250. This is the taxman paying you back the basic rate tax that has been deducted before you were paid that £1,000. Higher rate taxpayers can then claim up to a further £250 back from the taxman to reflect the extra tax they have paid. Actually all pensions enjoy this treatment- you can see it as a bribe from the government to save for your retirement, and a pretty good one at that. The exact amount of tax relief will depend on your circumstances.
But the thing that sets SIPPs apart from other pensions is what you can do with the money.
Just because it is a ‘Self Invested’ Personal Pension doesn’t mean you need a stripy suit and a phoneline to the stock exchange to run it. If you wish you can invest in individual shares, such as the likes of Tesco and Vodafone. Certainly some SIPP investors do this- but most SIPP members will invest in funds that are managed by expert investment managers; it’s these funds that set SIPPs apart from other personal pensions.
The fundamental problem is that we are all living longer.
You will typically get offered a few mediocre funds run by an insurance company in a bog standard personal pension. Insurance companies are experts at assessing risks, but they are by and large second rate when it comes to managing your money. Within a SIPP however, you can invest in funds run by some of the best investment brains in the country, from companies like Invesco Perpetual and Jupiter. The reputations of these firms are built on their investment performance, so you can be sure the returns that they make for investors are their number one priority.
Many of these funds will invest in UK shares or a mix of global shares. There are more risky, specialised funds that invest in specific areas like Latin America or the Far East, including China and India which many economists believe will be the major source of economic growth in the next 10 to 20 years. It doesn’t just stop at geographical regions either, there are funds that invest in property, gold, oil, agriculture... the list goes on.
There are generally three key ingredients that will determine how big your pension gets. One is the amount you pay into the pension, another is the cost of the pension – what gets taken out, but the third, the most important component, is the performance of your pension funds. The difference between a fund that returns 4% a year and 6% a year after charges can really build up over the long time span which pension saving takes place. After 30 years of saving £300 a month, a fund returning 4% after charges would be worth £206.254; a fund returning 6% after charges would be worth £293,777. The amount you receive would of course depend on the performance of the investments you choose.
It’s impossible to predict the investment performance of a fund, but there is a wealth of free information online which can help you pick out the funds with good prospects from the no-hopers. Our Wealth 150 is just one of these free resources. Regrettably there are still billions of pounds lying in consistently poor pension funds that will probably be there until the people invested in them reach retirement and realise they don’t have as much as they were hoping for. This is a real pity because saving into a pension is such a big step for many people which requires real discipline. But having taken that difficult step of putting money aside some people fail to check on their pension and weed out the funds that aren’t working as hard as they should be.
A new pensions age has dawned in which we are responsible for our own retirement savings...
Part of the problem is that in the past it has been difficult to monitor your pension. The pensions world has historically been a sleepy place where things happen about as quickly as rock formations. SIPPs have changed all that. You can now manage your SIPP online at the touch of a button, much like you can with your bank account. You can put money in, you can arrange your investments and chart their progress as often as you want. You can actually see the value of your pension day by day. In short you are in control of your retirement. That level of control is vitally important as we enter the second decade of the 21st century. A new pensions age has dawned in which we are responsible for our own retirement savings, whether we like it or not. Those who have the best tools for the job are likely to prosper. Those who stick their heads in the sand will find themselves relying on the charity of an overburdened state.
There are steps we can take to prevent the deforestation and poaching that threatens the giant panda. But the problem for final salary schemes is ultimately more fatal because it stems from our increased life expectancy, and this is not something we are going to compromise. There are good reasons for grieving over the demise of final salary schemes, but those who grieve too long without doing anything about it will fail to rise to the next challenge. Your retirement is at stake, the question is: are you in control?
Laith Khalaf
Pensions Analyst
The fundamental problem is that we are all living longer. Yes, believe it or not that is a problem. This has put unbearable pressure on final salary schemes, and even the state pension is creaking under the strain. The Conservatives want to start increasing the State Pension Age from 2016 and this will probably take place if they win the election. You could well find yourself working into your 70s unless you have squirreled away a good stash of acorns to see you through your later years. The good news is that people in the UK are saving more than they have for a long while. As we entered the second half of 2009, almost 9% of our disposable income was being saved for the future. This compares with 1% just a year before. The curious thing is that this jump in saving is a direct result of the recession, which has taught us all that borrowing is bad and saving is good.
final salary schemes are a bit like giant pandas- there are sadly very few of them about and in 5 years time there probably won't be any...
On the pensions front ever increasing numbers of investors are responding to the impending pension crunch by taking control of their own financial future. They are doing this by channelling their savings into a SIPP (Self Invested Personal Pension). About half a million SIPPs have been opened over the last 10 years, and this trend shows no signs of abating. The explosive popularity of SIPPs is in part due to the shift of responsibility from employers to individuals. But it is also in part down to the dramatic fall in the cost of SIPPs themselves. What was once a top of the range pension for the very wealthy is now affordable for all investors who are happy to make their own investment decisions.
So what exactly is it that makes a SIPP such a first class opportunity? Well first of all you can get back some of the tax you have paid over the year by contributing to a SIPP. For each £1,000 you put in the government adds £250. This is the taxman paying you back the basic rate tax that has been deducted before you were paid that £1,000. Higher rate taxpayers can then claim up to a further £250 back from the taxman to reflect the extra tax they have paid. Actually all pensions enjoy this treatment- you can see it as a bribe from the government to save for your retirement, and a pretty good one at that. The exact amount of tax relief will depend on your circumstances.
But the thing that sets SIPPs apart from other pensions is what you can do with the money.
Just because it is a ‘Self Invested’ Personal Pension doesn’t mean you need a stripy suit and a phoneline to the stock exchange to run it. If you wish you can invest in individual shares, such as the likes of Tesco and Vodafone. Certainly some SIPP investors do this- but most SIPP members will invest in funds that are managed by expert investment managers; it’s these funds that set SIPPs apart from other personal pensions.
The fundamental problem is that we are all living longer.
You will typically get offered a few mediocre funds run by an insurance company in a bog standard personal pension. Insurance companies are experts at assessing risks, but they are by and large second rate when it comes to managing your money. Within a SIPP however, you can invest in funds run by some of the best investment brains in the country, from companies like Invesco Perpetual and Jupiter. The reputations of these firms are built on their investment performance, so you can be sure the returns that they make for investors are their number one priority.
Many of these funds will invest in UK shares or a mix of global shares. There are more risky, specialised funds that invest in specific areas like Latin America or the Far East, including China and India which many economists believe will be the major source of economic growth in the next 10 to 20 years. It doesn’t just stop at geographical regions either, there are funds that invest in property, gold, oil, agriculture... the list goes on.
There are generally three key ingredients that will determine how big your pension gets. One is the amount you pay into the pension, another is the cost of the pension – what gets taken out, but the third, the most important component, is the performance of your pension funds. The difference between a fund that returns 4% a year and 6% a year after charges can really build up over the long time span which pension saving takes place. After 30 years of saving £300 a month, a fund returning 4% after charges would be worth £206.254; a fund returning 6% after charges would be worth £293,777. The amount you receive would of course depend on the performance of the investments you choose.
It’s impossible to predict the investment performance of a fund, but there is a wealth of free information online which can help you pick out the funds with good prospects from the no-hopers. Our Wealth 150 is just one of these free resources. Regrettably there are still billions of pounds lying in consistently poor pension funds that will probably be there until the people invested in them reach retirement and realise they don’t have as much as they were hoping for. This is a real pity because saving into a pension is such a big step for many people which requires real discipline. But having taken that difficult step of putting money aside some people fail to check on their pension and weed out the funds that aren’t working as hard as they should be.
A new pensions age has dawned in which we are responsible for our own retirement savings...
Part of the problem is that in the past it has been difficult to monitor your pension. The pensions world has historically been a sleepy place where things happen about as quickly as rock formations. SIPPs have changed all that. You can now manage your SIPP online at the touch of a button, much like you can with your bank account. You can put money in, you can arrange your investments and chart their progress as often as you want. You can actually see the value of your pension day by day. In short you are in control of your retirement. That level of control is vitally important as we enter the second decade of the 21st century. A new pensions age has dawned in which we are responsible for our own retirement savings, whether we like it or not. Those who have the best tools for the job are likely to prosper. Those who stick their heads in the sand will find themselves relying on the charity of an overburdened state.
There are steps we can take to prevent the deforestation and poaching that threatens the giant panda. But the problem for final salary schemes is ultimately more fatal because it stems from our increased life expectancy, and this is not something we are going to compromise. There are good reasons for grieving over the demise of final salary schemes, but those who grieve too long without doing anything about it will fail to rise to the next challenge. Your retirement is at stake, the question is: are you in control?
Laith Khalaf
Pensions Analyst
