If you'd prefer a retirement of cruises and country homes to one of baked beans and bungalows, then check out these tips!
My father celebrated his birthday at the weekend and, although this was hardly an unusual event, this particular birthday was something of a milestone.
After close to four decades of service to his country, D'Arcy Senior finally qualifies for his HM Forces pension. The good news is he that can look forward to a comfortable retirement, thanks to his new government-backed, index-linked pension for life, which is at least some reward for being shot at. Happy Birthday, Dad!
Being sensible people (and because my father is still in full-time work), my parents have decided that the best use of this extra income is to pay off their mortgage at an even faster rate. By paying my father's pension directly into their mortgage account, while maintaining their existing monthly repayments, my parents will see their only debt disappear rapidly, leaving them debt-free when dad finally decides to call time on his working life.
Naturally, this family event had me thinking about my own plans for retirement, which, until a few years ago, were practically non-existent. In fact, I enjoy writing for a living and running my own business so much that I don't ever plan to retire as such. Instead, I see retirement as a gradual transition from full-time writing to working as and when it suits me. Nevertheless, I'm building up a portfolio of cash, shares and other investments so that I could retire in fifteen to twenty years' time if ill-health prevents me from working or if I decide to retire early.
To cut to the chase, here are ten things to take into account when planning ahead for your own retirement:
1.Put together a pension CV
I've been working on and off since my late teens, so I've already clocked up almost two decades of employment. However, I didn't start contributing to a pension scheme until I was in my first post-University "career job" at the age of 23. What's more, thanks to other gaps in my pensionable service, I now have a more than eight "lost years" as far as pensions are concerned.
If you'd like to get an idea of how much pensionable service you have accrued, draw up a "pension CV" which lists all of your jobs during your working life, together with any associated pensions that you've built up. This will give you an idea of where your pensions are going to come from and how many years you need to "backfill".
2. Company pensions
Most employers provide company pensions (also known as occupational pensions) to their employees. The most common are known as defined-contribution or money-purchase schemes, whereby the employee and usually the employer contribute a defined amount (typically a fixed percentage of salary) to an investment pot which grows over time.
The most generous company pensions are known as defined-benefit or final-salary schemes, in which your retirement income depends on your length of service and salary prior to retirement. Sadly, increased longevity and lower investment returns have prompted hundreds of employers to replace their final-salary schemes with less generous money-purchase schemes. Company pensions really started to take off post-World War Two and now account for the majority of some pensioners' incomes.
By the way, if you have problems tracking down old company pensions, visit the Pension Tracing Service or call 0845 6002 537.
3. State Pension
Currently, the State Pension age is 65 for men and between 60 and 65 for women. However, this is set to increase for women from 2010, reaching 65 by 2020. Although the basic State Pension is hardly a king's ransom (it's at most £84.25 a week during the 2006/07 tax year), the government has plans to increase State Pension age to 68 by 2046, which means that some future pensioners may be working for more than five decades.
Your entitlement to the basic State Pension depends on the number of years in which you've paid National Insurance Contributions (NICs). To earn a full State Pension, men have to have 44 qualifying years, while women have to have between 39 and 44 qualifying years. Although our State Pension is insultingly low compared to those on offer in other European nations, at least it isn't means tested, so payment of your State Pension isn't affected by your other income.
4. Additional state pensions
As well as your basic State Pension, there are two other additional state pensions which you can accrue: the State Earnings-Related Pension Scheme (SERPS) and the State Second Pension (S2P), which replaced SERPS in April 2002. How much you receive from S2P and SERPS will depend on your earnings during your working life and your NICs.
However, some workers are not members of SERPS or S2P, because they have chosen to "contract out" by leaving these schemes in favour of directing these savings to company or private pensions. Deciding whether it is a good idea to contract out is fiendishly difficult, not least because the government keeps moving the goalposts!
5. Personal pensions
Personal pensions have been around for almost two decades, having been introduced by Mrs Thatcher's government in 1988 in order to enable the self-employed and those not in occupational pension schemes to save for their retirement. As with all pensions, payments into personal pension plans attract tax relief at your highest rate. Thus, for a basic-rate (22%) taxpayer, a £78 contribution attracts tax relief of £22, making a gross contribution of £100. Higher-rate (40%) taxpayers can reclaim a further tax rebate of £18, making their net contribution just £60 in this example.
Alas, thanks to their high charges, sky-high commissions to advisers and poor investment returns, personal pensions have left many savers wishing that they'd left their money in the building society. In particular, the returns from personal pensions have been awful over the past decade, as I warned in Pension Incomes Down 72%. Is it any wonder that more and more people put their faith in property, rather than pensions, despite their attractive tax treatment?
6. Stakeholder pensions
Partly in response to criticisms about rip-off personal pensions, the government launched low-cost Stakeholder pensions in April 2001. Stakeholder pensions have no upfront or exit charges, an ongoing management fee of no more than 1.5% a year, plus you can stop, start or increase your contributions whenever you want.
Hence, Stakeholder pensions are generally cheaper and more flexible than personal pensions, plus you can switch between providers without penalty. Even so, take-up of Stakeholder pensions has been disappointing, despite their attractions. You can view the charges and details of Stakeholder pensions using the Financial Services Authority's comparative tables.
7. Self-invested personal pensions (Sipps)
Despite being around since 1989, Self-invested Personal Pensions (Sipps) have really started to take off this year, thanks to new rules following Pensions A-Day on 6 April. Sipps are a form of DIY pension in which you decide where and when to invest your money, with or without professional help. In the past, only wealthy investors were keen on Sipps, largely because of their high management charges. However, a new generation of low-cost, online Sipps have brought investment control, flexibility and freedom to the masses, enabling even modest earners to build up an additional retirement income.
8. Annuities
Once you've built up a retirement pot (other than in a final-salary company scheme), you need to invest it to generate an income. For most people, this means buying an annuity: a guaranteed income for life provided by an insurance company in return for giving up a lump sum.
The bad news is that, for around a decade, annuity rates have been falling in line with long-term interest rates, which means that you only get a return of about 5% to 6% a year in return for waving goodbye to your life savings. Low annuity rates have discouraged many savers from buying annuities, with many preferring "income drawdown", whereby they leave their pot invested and simply withdraw an income from it.
Nevertheless, if you need an annuity, be sure to exercise your legal right to shop around for the best rates, known as your "open-market option". Finding the highest rates through an annuity broker such as the Annuity Bureau, Annuity Direct or Hargreaves Lansdown could boost your retirement income by 30% -- or even more if you're a smoker or have a life-shortening illness.
9. Individual Savings Accounts (ISAs)
Here's my confession: since leaving the Fool a year ago to become a freelance writer, I haven't contributed a single penny to a pension. However, retirement saving doesn't begin and end with pensions, because there are other options open to investors!
For instance, at the start of this tax year on 6 April, I put the maximum £7,000 into a self-select shares maxi-ISA, which is simply a tax-free wrapper around a collection of investments of my choosing. For me at least, there's little difference in tax terms between investing in a pension with tax relief and being taxed on the income which it produces, and investing without tax relief in an ISA from which I can withdraw a tax-free income. However, ISAs are more flexible, so they're my retirement vehicle of choice at the moment, although I do plan to contribute to a pension later this year.
10.Savings accounts
Finally, don't forget that a good, old-fashioned savings account can be a useful tool when saving for retirement. If you have less than five years to go until retirement and don't like taking risks, putting some money in cash is one option worth exploring. To maximise your interest, put the first £3,000 of savings each tax year into a cash mini-ISA, which pays tax-free interest. If you do this, remember that you can only invest at most £4,000 into a shares mini-ISA in that particular tax year.
More: Use the Fool to find better pensions, investments and savings accounts!