The latest budget poured a bucket of ice water over the enthusiasm of most private companies for company pension schemes. It certainly seems likely that, in future, the onus will be on the financially aware individual to look after his own pension provision.
This raises the prospect of planning and setting up a personal pension as an alternative to whatever scheme government might offer under its (still-vague) plan for a new pensions initiative in 2012.
When planning your personal pension, it is best to establish what standard of living you aspire to in your retirement, and calculate backwards from there.
The first step is to decide what age you want to retire at. Then set yourself a target retirement income, relative to the lifestyle you enjoy on your current salary. The key here is not to focus on a finite cash sum, but to decide what ‘buying power’ you require to live adequately in your retirement years. You might, for instance, wish to calculate the ‘buying power’ equivalent to half your salary’s ‘buying power’ today. Then you must set a premium which is realistic in order to obtain that buying power, given your prognosis of inflation levels in the years from now until you come to retire.
The key word here is ‘realistic’. “There is no point in putting in £50 per month, and expecting to retire on the salary you left at on Friday,” said Gareth Flanagan, Independent Financial Planner at Principle First.
Calculating the pension premium you would need to achieve your desired goal is now possible using Legal & General’s pension calculator, on its website. Users can enter their current salary, indicate what percentage of that they wish to have in their retirement, enter their assumptions for how much their fund might grow, and thus calculate what premium they should be paying now.
As a guideline, civil service workers typically contribute 6.5% of salary to their pension scheme, which Flanagan cited as a reasonable benchmark for private sector workers building their own personal pension as well.
The major problem we face in pension planning is factoring in inflation, which will dictate how the purchasing power of your savings is depleted over time. “I would suggest that you base your premium on ‘national average earnings’ rather than linking this to retail prices,” said Flanagan.
“Earnings always increase ahead of prices. When, in 1979, the government broke the link between the old age pension and national average earnings, and decided to upgrade pensions each year in line with prices instead, the buying power of pensions fell considerably.”
In order to keep your ‘pensions ship’ on course towards your designated retirement goal, you should review and recalculate your premiums at least once a year. “Those who started a pension with a £50 a month contribution 15 years ago, and never went back to adjust their contributions in line with their goals, are now often horrified to find how little their fund is worth,” said Flanagan.
Your choice of pension type is best dictated by the level of premiums you decide to pay.
“The best option for smaller premium contributors is probably a stakeholder pension. These have a limited fund range, but the annual management charges are capped at 1.5% for the first ten years, and 1% thereafter,” Flanagan said.
“If you decide to contribute larger premiums, then you need to think of taking a more hands-on approach, and choose a product with a better range of funds. This leads you on to personal pensions or Self-Invested Personal Pensions (SIPPs) which gives you more control and access to a wide range of funds. Through a SIPP you can also invest in other asset classes, such as commercial property, art, and vintage cars,” Flanagan said.
“In this, you decide where the money is invested, with the help of your adviser. You would first set your risk profile, and then you may discuss individual stocks and shares, individual funds, or invest in commercial property,” Flanagan said.
