How to get good guidance about using your retirement

Everyone knows that the younger you are when you start paying into a pension, the more you’ll receive when it’s time to pay out on your retirement. Nevertheless, there are still many who delay making that start and a frightening number of people who believe that their entitlement to a basic State pension will be enough to see them comfortably through old age. While they might be right about the entitlement to a State pension, they are most unlikely to find that the State pension alone will ensure anything like a comfortable retirement. But if taking care of your own pension arrangements is to be an option, where do you go for the best pension advice?

Even a cursory look at the subject of pensions will tell you that it can become a pretty complicated topic, with a bewildering range of different products, to suit different ends and purposes. For example, you might be aware that your employer runs a pension scheme and, indeed, you believe that the employer contributes to your pension on your behalf. But is this an occupational pension scheme. If it is, do you know whether it is salary-related or whether it is a defined contribution or money purchase scheme?

Alternatively, is your employer offering a stakeholder pension scheme or running a group personal pension scheme? You have heard that it is possible to set up your own stakeholder pension. How would this differ from your having your own personal pension arrangement? Is one or the other – a stakeholder or a personal pension scheme – something you should be setting up for yourself?

These are all perfectly reasonable questions, but how on earth do you go about answering them? It’s very much a specialist subject and the ground rules seem to be changing all the time. You have might also have heard, for example, that the government is introducing changes requiring all employers to offer a pension in the future and to make contributions to the schemes set up. This can be the employer’s own scheme or the government’s new central scheme that is being established.

Yet further changes will affect the minimum age at which you can start drawing your pension benefits. Subject to the rules of your particular scheme, the minimum age is currently 50, but this will go up to age 55 by the year 2010 (though you will no longer need to stop working altogether to be able to draw the pension, provided continued employment is allowed by the rules of your particular scheme). To phase in the higher age level, pension fund managers have been given the period from April 2006 until April 2010 to raise the age limit. Clearly, you will need to know when it applies to you.

All in all, therefore, it is clear that questions about pensions can become quite complicated. They are further complicated by your need to know exactly how your own individual circumstances should affect your pension options and decisions. A pension is a long-term investment, which accumulates many thousands of pounds of your hard-earned cash – it’s important, therefore, that you are guided towards the right decisions.

Given the importance of getting it right, the sensible course of action is to consult an independent financial adviser about your existing and future pension options. This will ensure that your decisions are based on the best, professional and expert, independent pension advice. In the wake of the global financial crisis, governments all over the world are struggling to make ends meet. This has led to an international decrease in pension funds, which has led many to seek pension advice from financial professionals. However, you do not have to pay an expensive fee to learn how to improve one’s future pension returns – the ‘secrets’ are accessible, generally easy to implement, and best of all free. This article will cover four ways of increasing one’s pension upon retirement.

The first, and most obvious, is salary sacrifice. A ‘legitimate’ form of tax evasion, salary sacrifice involves the purchasing of items that attract a tax rebate or are tax-deductible. This effectively decreases one’s taxable salary while keeping constant one’s ‘true’ salary. As taxable salary is also used in pension calculations, salary sacrifice can have a double benefit: both immediately, via a decrease in tax payments, and in the long-term, as increased pension payments. Each government has a different list of tax-free and tax-rebated items, so it pays to do one’s homework (quite literally). Nonetheless, almost all governments offer subsidies on educational, infant-related or green products such as textbooks and solar panels.

Secondly, one should take advantage of tax-deductible contributions to pension. This is effectively free money: one both saves up pension money for the future and receives immediate tax relief. Contributions are the obvious follow-on from salary sacrifices, as the money immediately saved through salary sacrifices can be re-invested into contributions. However, most contributions have limits and are generally only effective (as opposed to banking or investing) within higher tax brackets.

Most employers offer staff pension schemes as a way to offer more to their employees. Employers pay a portion of the employee’s salary directly into a trust pension fund, which will mature upon retirement. This is because businesses are generally taxed on the wages they pay. Staff pension schemes, which are paid directly into employees’ pension funds, mitigate this tax. Thus, while employees essentially receive free money in the form of pension, the net effect upon their salary is nil. If you are currently employed or plan to be in the future, you should consult your employer concerning the above.

Finally, another obvious – yet often overlooked – principle is to visit your respective national websites. Specifically, retirement and pension government departments often publish their practices online. When browsing through this documentation, you may find something that specifically applies to your situation, or even clarifications on how to improve your financial status in general. Moreover, these sites often offer contact details and the like – useful if applying for a special consideration scheme.

As can be seen, increasing your pension is mostly a matter of legally utilizing and maximizing your available tax benefits. Nonetheless, living comfortably requires more than an above-average pension, and the best route to a wealthy retirement is still that of saving. Pension has been likened to an investment. While it is not necessary for financial success and independence, it can very effectively support a balanced portfolio. Not attempting to increase one’s pension is the equivalent of refusing ‘free’ money. You can also top up your income with other investments by saving the maximum amount on an Individual Savings Account, buying shares, saving in other investments such as bonds or even just by investing in property.

Overall the best thing for anyone to do is begin contributing to a pension as soon as possible and as long as you know not to rely on the state pension if you want to have an enjoyable retirement.

For more information on this topic speak to your financial adviser or someone who specifies in pension advice.

Why have ‘contracting out’ savers ended up with less state pension?

According to recent statistics, the official number crunchers have revealed that the estimates for “contracting out” benefits for extra National insurance is incorrect. As a result, it has left many losing money.

The Government Actuary Department have previous files which clearly point out the predictions they have regarding government bonds. It also included investment returns and life expectancy. Through the analysis, it was revealed that all of these information are wrong.

The data was carefully examined by Steve Webb who is a former Pensions Minister. He is now the policy director of Royal London. He uncovered the false data while he was answering questions for his This Is Money column which is part of his regular tasks.

Webb assigned a Royal London senior actuary to analyze the paperwork he wanted to have clarified. He specifically wanted to find out if the Government’s predictions were accurate. He focused on what people who have private pension would be able to build up, having their benefit in hindsight. In this article, we clearly explain what “contracting out” means and how it impacts the forecasts of GAD.

The meaning of “contracting out” & how it affects pensions

Most people who receive a state pension forecast realize that the figure is lower than the full flat rate which was recently implemented. It is £155.65 per week since the pensioners weren’t able to give enough contributions for the National Insurance over the past few years. This is mostly due to them being “contracted out” of paying for any additional top ups for state pension. Additionally, it’s also because of underpaid NI while they were still working. As a result, the money is being given to them through the use of rebates. These rebates were part of the people’s private and work pensions which they thought would help them gain a higher rate in the end. Employees who were part of final salary pension schemes were assured a guarantee to make sure that they wouldn’t lose out. However, it wasn’t the case for employees who were in workplace or personal defined contributions. In 2016, “contracting out” was fully eliminated from final salary schemes. In 2012, the other types were eliminated first.

As of now, the Department for Work and Pensions takes away individual deductions from state pensions. This is also called the Contracted Out Pension Equivalent (COPE). It is solely based on the additional funds which it assumes the pensioners have built up using their rebates after they have been contracted out. It was the Government who decided the size of the original rebates. They based it on the estimates they have gathered from studying GAD’s documents. This is the main reason why there is still some interest in the accuracy of those documents.

What did GAD predict in their forecasting?

Neil Walton who is the senior actuary of Royal London have carefully analyzed the GAD documents. According to his findings, the documents were very technical. He found out that in order for GAD to calculate the appropriate contracting out rebates, they had to forecast what will happen in the future. It was between 1987 and 2012 when the rebates were reviewed for a total of six occasions. In each of those reviews, they had to assess three important factors which are:
1) How much investment returns the pension will achieve at the end of the entire period
2) The range of government gilts which the pension will be priced on
3) How long the pensioner will live after retirement

What was GAD’s prediction?

For investment returns, they have predicted that the money purchase pensions would be able to achieve an investment return of 1.5% per year. The real results showed that since the 1988 RPI inflation, the investment return is at 3.4% annually. Their assumed investment mix has reached 9% on average. For gilt yields, they have predicted that the retirement yield would be 3.75% each year which will then decrease to 2% in the 2000s. They expected it to come back up to 3.5% after 2017. The real results showed that since 1981, the assets real return was at 2% each year until the mid 2000s. For how long the pensioner will live after retirement, GAD used the population mortality tables which resulted in the 10 yearly censuses. In reality, longevity rates have been constantly improving over the past few decades.

What was the DWP’s calculations?

They are mainly responsible for calculating the deduction which is called the Contracted Out Pension Equivalent (COPE). It directly affects the impact of being contracted out on the person’s eventual state pension in the future. According to Waites, the COPE calculation takes into consideration a deduction accumulated within specific periods of time when the pensioner was contracted out. This means that persons who are near their state pension age, they will get less than the new full state pension. If the individual has been contracted out within a defined benefit scheme, it will be able to fill the gap. For individuals who have been contracted out while they were in a defined contribution scheme, they will come to find that their private pension will be much less than the deduction which has been take off from the starting amount. In both of these cases, if a pensioner is at least eight years from their state pension age and they continue to make National Insurance contributions, they will most likely be okay. This is because the contracting out deduction wouldn’t be able to reduce the original amount of the basic state pension.

Is there something that can be done to help these pensioners?

In his most recent column, Steve Webb said that he doesn’t believe that the Government Actuary made their assumptions willfully during the 1980s until the 1990s which would turn out wrong. However, as a result of those assumptions many people who have reached their pension age now have to lower their total pension compared to if they had remained in the state scheme. He added that as of right now the assumptions made by GAD cannot be changed easily. The taxpayers during the 1980s to the 1990s agreed to follow those assumptions because at that time it was the best guess of the Government Actuary. Taxpayers in our world today are very unlikely to become fully prepared to do good amidst the shortfall, specifically when the individual pensions’ investment weren’t as they hoped it would be.