Q&A: How to build up your pension fund

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I am 61 and receiving my state pension but haven’t started to draw my personal pension. I am worried about how much my fund has gone down and want to continue to work. Is it OK to continue working? I declare my pension on my tax return, Stuart Smith, Clapham

Dear Stuart, There is no reason why you can’t go on working as long as you like. Your employer is not allowed to impose retirement on you before age 65 unless they can objectively justify that decision.

With regard to your personal pension you can take the benefits at any age up to 75, so there is no rush to take the money out if you can’t afford to retire.

As you are still working, you should also try to save in a pension. Again, you can continue to save in your personal pension up to age 75.

If your employer offers a pension scheme then you should join that, because the employer will normally match what you pay in. Your employer cannot exclude you from the pension scheme just because of your age. Regards, John

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I am a 35 year old freelance TV director with no stable income and no pension set up. I have been thinking about whether to set up a pension but am wondering whether it is worth doing so in the current climate as I won’t have any employer contributions so it will only be what I pay in each month? Are there other ways I should think about saving for my retirement? Tom Holland, London

JL: As a freelancer, you are right that it is difficult to make a commitment to regular saving because your earnings are so variable.

Saving what you can in an Isa rather than a pension is likely to be a better bet for you. You can still get your hands on the money if you need it and, you can also gradually move your Isa savings into a pension later on, when times are more certain.

If you do save in a pension in the future, invest in years where you are a higher rate taxpayer to get maximum value.

I’m 26 and have a company pension scheme, but not sure what it’s all about, how much should I be saving? And is it a better investment than trying to save up for a deposit on a house?

Lara Conway, London

JL: A rough rule of thumb is that you should save half your age as a percentage of your salary to get an index-linked pension of two-thirds your final earnings. For you, that means saving 13 per cent of your earnings, which might seem a lot, but pensions are more expensive that most people think.

Another way to work out how much you need to save is think how much income you would need if you retired today and multiply that by 20. That will give you the amount you need in today’s money but you should reassess this to take account of inflation.

Saving in a pension is more tax-efficient than buying a house. You get tax relief on the contributions paid in, tax-free growth on your pension fund and a tax-free lump sum at retirement. Also, because you are living in the house, part of the investment return, the income, is lost because no one is paying a rent.

Your company pension is also worth saving into because your employer will probably match what you pay in and the charges will be low.

That said, you can’t live in a pension fund, so the answer may be both.

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Do you believe that the recent initiatives to add more transparency to the financial system can help to re-build the investor’s confidence in pension funds? Viktor O. Ledenyov, Ukraine

JL: It is true that the recent economic turmoil has put many people off saving at all. However, pension funds are usually ring-fenced, so that no one can steal them. But that doesn’t mean that they can’t go down in value.

As an individual, you can avoid investing in funds that are particularly susceptible to uncertain outcomes, such as those exposed to secondary market instruments like collateralised debt obligations (CDOs). These were the type of investments that lost all of their value in some cases during the credit crisis.

Governments around the world need to rebuild the public’s faith in the financial system. This will take some time to achieve. The way to do this is through better education, so that people understand what they are investing in. Here in the UK, the government has now added financial education to the school curriculum, and the UK is also about to launch a new Money Guidance system that will allow members of the public to consult with independent knowledgeable advisers without charge.

We have been through recessions before, most recently the early 1990s in the UK, when the value of people’s homes fell below the value of their borrowing in many cases. It didn’t take too long for the public to forget the dangers of paying and borrowing too much for residential property as we had another property boom 10 years later. So, maybe people can be reassured relatively quickly.

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I’m part time – what pension rights do I have from my employer? Vicky Smith, UK

JL: Employer pensions in the UK are not mandatory and, therefore, no employee, whether part-time or full-time has a legal right to an employer’s pension.

However, where an employer does provide a pension, there is normally a contractual right to that pension under the employees’ contracts of employment. It is still possible for employers to remove your pension, but they would have to agree a new contract of employment with you following a period of consultation.

You say that you are part-time. If full-time staff doing a similar job are entitled to a pension and you are not, this might simply be down to the employer’s choice to pay full-time and part-time staff in different ways. However, this sort of practice might amount to discrimination if say the part-time staff are mainly women (sex discrimination) or are younger (age discrimination).

If you think that you are being treated unfairly, you should speak to The Pensions Advisory Service, TPAS (0845 601 2923 9am - 5pm). This service is free and TPAS will give you guidance on the issues as they apply to you and what steps you can take.

From 2012 (2015 for smaller employers), if you earn at least £5,035 (2006/07 tax-year terms), then you will be entitled (you will have a legal right) to an employer’s pension contribution of 3 per cent of salary, if you pay in 5 per cent (gross) of your salary. You will also get 1 per cent tax relief, so the nest cost to you will be 4 per cent of salary.

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I am 51 years old and have a company pension scheme into which both the company and I contribute, a Sipp account into which I contribute and a stock and shares Individual savings account. I would like to retire at 60 and would like your advice on the best way to build up a portfolio (a cautious one) that will provide me with a enough income for a comfortable retirement. There are so many articles around that it is very confusing to decipher all the information to select the best option, Bharti Hindocha, Richmond, Surrey, UK

JL: You don’t say what sort of company pension you have - whether it is a defined benefit (final salary) or defined contribution. If it is a defined benefit pension, then you will already have some certainty of income in retirement. If it is defined contribution then your investment strategy should cover both your company pension and your self-invested personal pension (Sipp).

As you are within ten years of your intended retirement age, you should be starting to adopt a lower-risk investment strategy.

If you intend to buy an annuity with your pension savings, then you should look to move your savings into funds which replicate annuities. Annuities use gilts and corporate bonds to deliver retirement income. You can also take a quarter of your fund as a tax-free lump sum.

Therefore, over the next nine years, you should aim to gradually move 75 per cent of your savings to fixed interest funds and the other 25 per cent into cash deposit funds. This is called a lifestyle strategy. By switching out of your existing funds (I assume these are invested mainly in equities) gradually, this means that you come out of these investments at an average price over that period rather than at the top or bottom of the market, both of which are difficult to predict.

If your company pension is defined benefit, then you may be able to take more risk with your Sipp savings, if you accept that you may not be able to draw the Sipp at age 60, for example, if the value of the funds in which you invest are depressed at that time. However, you should only take additional risk if you can afford to live off the income from your company pension at age 60, and you are personally comfortable with investing in more volatile funds.

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Could you please give me your opinion on the best strategy for building up a pension fund, taking into account the problems associated with the existing high volitality in financial markets? Viktor O. Ledenyov, Ukraine

JL: The biggest risk people must address is not saving enough for retirement. Too many people make inadequate savings and try to compensate by investing in higher-risk, higher-volatility assets such as shares. This can lead to disappointing outcomes.

Younger people should be able to take more risk by investing in higher-risk, higher-volatility funds because relative risk diminishes over longer periods. However, even some young people are not comfortable watching the value of their savings fall rapidly during turbulent economic times.

Older people, within ten years of their intended retirement age, should begin to invest in lower-volatility assets such as government and corporate bonds. These assets match the income streams that most people require when they retire. Some older people may be able to take more risk if they have other income security such as a fixed pension from the government or a former employer.

So, the best strategy is one that fits the needs of each individual, their personal attitude towards taking investment risk (how tolerant they are to volatility), their age and their other sources of income in retirement.

Once you have decided how much investment risk you are prepared to take, you should calculate how much you need to save based upon a conservative estimate of the rate at which your chosen investments will grow, and the amount of imcome you will need in retirement.

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Hi, could you tell me if it would be beneficial for me to start a pension fund for my retirement at this present time. I am 46 yrs old. If so, what type of funds? Also, what is your thoughts on a ETF fund? Thanks, Ronan Markey, Dublin

JL:

You should start saving as soon as possible. The longer you leave it the later you will need to retire or the poorer you will be in retirement.

If you have access to an employers pension scheme, this is usually the best way to save. Most employers match the contributions paid by their employees, and they are also able to negotiate lower charges from pension providers.

Don’t be put off saving by the current economic situation. If you are uncomfortable with taking investment risk you can invest in cash deposit funds or funds holding government bonds.

The fund you choose should have regard to your personal tolerance to investment risk and volatility. As you are aged 46 and appear not to have started saving for retirement yet, I think that targetting age 65 or beyond would be most realistic, although I don’t know what other assets or savings you have.

That gives you a twenty years plus investment horizon, so you can afford to take some risk, for example, by investing in equities, provided you are comfortable doing so on an individual level.

Exchange traded funds (ETFs) track financial indices such as the FTSE All Share in the UK or the Dow Jones in the US. These are different from tracker funds in that they can be traded at a real-time price at any time during the day. Tracker funds are priced just once a day so you can’t choose when to deal.

You are in the Republic of Ireland. In the UK, ETFs are not generally available via individual or company pensions. I suspect that this will also be true in RoI, so you will have to take out a self-invested plan if you want to invest in ETFs. Like the UK, self-invested plans are available in RoI.

Some commentators suggest that ETFs are also cheaper than tracker funds, but this is not always the case. Weigh up the charges and whether you want to trade your pension fund intra-day, and that will inform your decision whether to go for a tracker or an ETF.

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