retirement planning – shrewdcookie.com personal finance blog

04Nov 2009

Change in Personal Pension Retirement Age – Act NOW!

I wrote in a previous article about the change in pension retirement age for personal pension plans from age 50 to 55.

When does the change come into effect?

This change comes into effect on 6th April 2010. You may need to take action before that date if you’re aged between 50 and 55 and wish to take pension benefits BEFORE you reach age 55.

Failure to act could mean that you are prevented from taking your pension benefits from your personal pension until you reach 55 – which could have a serious impact on any change in lifestyle you are planning on making in the next 5 years.

Newspaper article highlights opportunity to move t Income Drawdown

This article in the Daily Mail talks about this change in legislation maybe affecting up to 3 million people.

The article highlights the case of a gentleman who will be 50 on 5th April – the day before the change in retirement age comes into effect!

It mentions the option of moving to an “income drawdown” arrangement.

With an “income drawdown” arrangement your existing pension fund is moved into a new contract, tax-free cash (now known as “pension commencement lump sum”) of 25% of the fund value may be taken and the remaining pension fund remains invested and an income may be drawn from it.

This income is limited by the Government Actuaries Department and depends on a number of variables – a financial adviser can provide guidance on this should you decide to take your benefits through this route.

You don’t have to take income immediately from the income drawdown plan and most pension providers have flexible contracts.

You also have the opportunity to move from an income drawdown arrangement to an annuity at any time after commencement (known as vesting – see my article on maximising pension income in year one)

The one downside is that once you move into “income drawdown” the remaining pot will be subject to tax on death, whereas in the “prevested” personal pension plan, the fund might be held outside your Estate through a trust arrangement – you need to check with your specific pension provider to see if your personal pension with them benefits from this kind of trust arrangement.

Alternative Options

You could consider taking your pension benefits by purchasing an annuity. An annuity is an income for life – in exchange for your pension pot (after you have taken your tax-free cash – why wouldn’t you?!) the life company will provide you with an income for life.

This route offers lower risk – once the annuity commences the life office is carrying the risk that you die before the money runs out.

However, annuities are generally inflexible but do suit many people.

It is important to take advice before making any decision.

Alternatively, like most people, you could simply do nothing – many people are not in the fortunate position to be able to benefit from taking their pensions before age 55 – but that’s a topic for another day!

Action needed

If you will be aged 50 or over before the end of this tax year on 5th April 2009 AND you wish to take your pension benefits BEFORE age 55 that you contact an Independent Financial Adviser to ensure that you don’t miss out.

Act quickly as well – don’t leave it until the last minute – with postal strikes, increasing amounts of work in respect of ISA’s etc before tax year end and the generally slow speed at which pension funds move between companies you need to ensure that your IFA has a suitable time in which to understand your position, advise on the most appropriate course of action and to actually physically move the money into the new arrangement!

The whole process can take a few months – even longer depending on the pension provider.

06Oct 2009

A few interesting blog posts you might like

by shrewdcookie ⋅ 1 Comment

I thought I would post about a few interesting articles I have read recently – I thought you might find them interesting reading – a little light relief from all this ISA allowance increase, change in pension age malarkey!

Rob over at MoneyWatch posted an interesting article “Create a Home Inventory” which got me thinking about an old game we used to play at cubs – the cub leader would bring our a tray with about 20 different items on and we used to have a about 20 seconds to look at the tray. The tray would then be taken away and we had to try and remember as many as possible.

I am sure if the worst happened and I was burgled or had a fire I would be able to remember a lot of things but I know for sure that I would not remember everything – I am therefore going to start cataloguing all my possessions – a spreadsheet will do the trick!

Meanwhile, Lee over at FivePencePiece, when he was not busy with Labour Party conference or his appearance on the radio wrote an article entitled Patience is a Virtue. Lee reminds us that nothing happens overnight and that “a journey of a thousand miles begins with a single step”.

I read a book many years ago on the subject of goal planning – one of the most important chapters for me talked about the need to take any task which at first glance might seem very difficult and break it down into smaller, more manageable “chunks” – for example, if you’re overweight and need to lose say 3 stone then this in itself is quite an achievement.

But if you break it down and say “I will lost 1lb per week” which is more than possible given some exercise and changing your diet, then you would achieve your waste loss goal in 42 weeks!

The final blog post I liked recently was “51 Unusual Money-Saving Tips” from over at WiseBread – I love lists – I am always making lists (mainly “to do” lists!) and love this kind of post – it acts like a hub with so much information coming off this hub in a series of “spokes” – just like a wheel on a bike.

Anyway – there should be enough for you to be going on with there – please let me know which posts you have read recently by posting a comment and a link below – please feel free to link to other personal finance blogs you visit.

29Sep 2009

Personal Pension? – Minimum Retirement age 55 from 6th April 2010!

by shrewdcookie ⋅ Leave a Comment

Current Personal Pension Minimum Retirement Age is 50

Did you know that, if you’re lucky enough to be in the position, you can at present take your personal pension benefits from age 50?

Increasing to 55 from 6th April 2010

The rules are changing though – from 6th April 2010 the minimum age for taking personal pension benefits is increasing to age 55. The change in the pension rules could mean those people who are now aged 50-54 and wanting to take their pension benefits early being forced to take pension benefits from age 55 – thereby having to defer retirement for up to 5 years.

So, it pays to plan ahead!

Does this just affect people who want to take an annuity from their personal pension plan?

No – it also affects anyone who wants to move into “income drawdown” before age 55 as well as anyone receiving pension benefits in the form of “phased retirement” – this is whereby you take a percentage of your pension plan each year and is designed, through a combination of tax-free cash and annuity income, to provide you with a level of pension income which allows your remaining pension plans to remain invested and benefitting from tax-efficient growth.

Any unvested (i.e. pension funds which you have not taken pension benefits from) will have to remain so until age 55.

If you’re currently aged under 55 you seriously need to speak to your pension/financial adviser as soon as possible.

Action

If you’re in “phased retirement” through your personal pension and are currently under 55 then urgently speak to your financial adviser about what actions you need to take as your income could be cut short from 6th April 2010.
If you’re aged 50-54 now and plan on retiring in the next few years you should consider taking benefits now to ensure you don’t fall foul of these changes in personal pension minimum retirement ages.

Naturally, before taking any actions with regard to your personal pensions or any other investments you should seek advice from a suitably qualified professional adviser.

And finally……

Be sure to subscribe to our newsletter – it’s free and you can cancel it at any time.

Also – did you know you can receive our blog posts via RSS.

Pension Planning for Non-Earners

Instant Returns on Pension Contributions

Personal Pension Plans – an Introduction

05Sep 2009

Buy a Financial Calculator

by shrewdcookie ⋅ 2 Comments

Anyone who is committed to increasing their personal wealth would be strongly recommended to buy a financial calculator.

I bought my first financial calculator when I was at University some 18 years ago, it was a Hewlett Packlard 10B Business Calculator, and I still use it today. The model has been updated now – Hewlett Packard 10BII – but the new model still offers the same great facilities I have come to know and love.

It carries out all the normal calculations you would expect of a scientific calculator, but also provides the ability to calculate the following:

Growth of a set level of regular savings, given amount, rate of interest and term in years is known
Net Present Value (of a range of regular inflows of cash)
Internal Rate of Return
Compound Interest Calculations
Time Value of Money

For example, if I save £100 per month, for 25 years, at 6% interest this calculator will calculate the future value of my savings (the answer is £69,299!). If I change this to 26 years, the answer is now £74,807 – an additional £5,508 for investing for another 12 months!!!

For retirement planning, say I have identified that I need a pot of £360,000 in 23 years time to retire on the income I need to live in retirement, I can calculate how much I need to invest on an annual or monthly basis, assuming any rate of return, to hit the target.

The third calculation I like to use the calculator for is calculating how long money will last for, for example, I have £10,000 today and I wish to draw £250 per month from it. Based on an interest rate of 4%, my calculator shows me that my money will last for 43 months.

Here’s the manual (4.0MB) for my Hewlett Packard calculator – it shows all the different calculations you can do with a financial calculator.

Buy a financial calculator from Amazon.

Related articles:

Rule of 72 – Time Value of Money

It’s Not How Much you Save, But How Long

16Jul 2009

Retirement is an income, not an age

by shrewdcookie ⋅ 1 Comment

It occurred to me recently with all this talk about the need to raise retirement age in the UK due to our ageing population, that many people have got it wrong.

They are thinking of “retirement” as an age, yet in reality it should be an income – when you have sufficient assets to provide you with enough income to replace that which you earn working the 9 to 5, then you are in a position to “retire”.

The overall goal for financial planning in the current day and age must surely be to try and attain “financial independence” in our own lifetimes. To this end, we should endeavour to accumulate sufficient assets around us to provide enough income to enable us not to have to work for a living.

So with this in mind, give consideration to the amount of “income” you would need to retire today – do you really need the full amount of your take-home pay or, with careful planning and spending, could you live on less than you currently receive.

I guess the answer to this must be “yes” – with retirement comes one of the greatest assets we can ever attain – the asset of time.

With time on your side, you can plan your life and expenditure better – you have time to browse for bargains at the supermarket, to shop around for a better deal on your house or car insurance, to cook your own meals instead of buying “expensive” pre-prepared ones.

Start by analysing your income and expenditure – read this article – cashflow forecasting – planning income and expenditure.

27Apr 2009

Instant Returns on Pension Contributions

by shrewdcookie ⋅ Leave a Comment

Instant Growth of 36.36% on Your Money

In the current investment market there is very little opportunity as far as most people can see it to make a decent short-term return on your money.

There is however a nice tool which can be used to generate an immediate return of 36.36% on your money invested.

This tool is a personal pension plan – the plan works by allowing tax-relief immediately on any contribution made into the plan. For basic-rate taxpayers, the immediate rate of relief is 20%.

For example, if an investor makes an initial net investment of £80, under PRAS (Pension Relief at Source – which is available to both employed and self-employed investors) the actual gross amount invested is £100 – the pension provider reclaims income tax of £20 from HMRC on behalf of the investor.

If the investor is over the age of 50 they can currently vest their benefits and under pension legislation can take up to 25% of their fund as a tax-free lump sum with the remaining fund providing pension income – normally by way of annuity purchase or income drawdown – or alternatively take no tax-free cash and use the whole fund invested to provide retirement income (which remember is subject to income tax.

Enjoy Discounts on Pension Funds and ISA’s – Hargreaves Lansdown

In our scenario above, the investor would probably take the tax-free cash – it is generally better to have this cash tax-free in the hands NOW rather than taxed in the hands over time although the most appropriate course of action depends on your own particular circumstances – please take suitable advice from an IFA.

In this scenario then, having made an initial investment of £80, the investor has received an immediate pension fund of £100.

By taking 25% tax-free cash they will receive back £25 (25% of the fund value) which leaves their fund valued at £75 with them having made a net investment of £55 (£80 invested minus £25 tax-free cash received back).

£75/£55 – an instant return of 36.36% on the money invested.

The investor is then free to take an income from these pension funds, normally through annuity purchase or income drawdown arrangements, but the initial gains on the money invested of 36.36% will have a corresponding increase to the level of income which the investor can take from their pension fund.

Naturally we would strongly urge you to take independent financial advice before investing in a personal pension or other investment vehicle to ensure the course of action you are taking is the most appropriate given your own particular circumstances.

Download this article as a PDF (284kb)

12Apr 2009

It’s not how much you save, but how long

by shrewdcookie ⋅ 1 Comment

Long Term Savings – the need to start early

Saving for income in retirement can be a daunting thought for most people – the problem they face is that they simply don’t know how much they need to save between now and retirement.

In this article we consider the time value of money, and in particular, the benefits to be enjoyed from “compound growth”. In later articles we consider just how you go about working out how much you need to invest to plan for your own retirement income.

The Rule of 72

In the article “The Rule of 72 – the Time Value of Money” we discussed a simple technique for calculating how your money grows over time whereby dividing the rate of growth you are enjoying on your money into 72 shows the number of years it takes for your money to double in value.

For example – if you were lucky enough to receive 6% annual interest on your money in a savings account then this would double in value every 12 years (72/6=12).

Compound Interest

The principle of compound interest is simply one of “money makes money”. An example of this would be investing £100 in a savings account at 10% interest – after one year your money would have grown to £110 – after two years, £121 – you have earned an extra £1 interest in year two as not only have you earned 10% on your original investment of £100 but you have also earned 10% interest on the £10 interest you made in year one and this continues for as long as you leave that money invested.

Over time, as the proportion of “interest earned” grows then the rate at which your overall investment grows also increases – it’s like a snowball effect – when you roll a small snowball down a hill at first it grows slowly – the more it rolls, the more snow it picks up on each rotation and the faster it moves…….

The following chart shows how £500 per month, enjoying a simple return of 5% per annum, grows over a 30 year period –

The above chart shows that in the earlier years the rate of growth on the funds invested is relatively low, and as the benefits of compound growth accumulate over time the curve of the graph becomes steeper as each and every £1 of interest earned subsequently earns its own interest!

It’s not how much you save, but how long….

The principle of compound interest therefore brings us nicely into the subject of pension planning, saving for retirement or any other form of long-term saving.

For the sake of this example we will consider that you wish to retire at age 60 and you are now aged 30.

You have calculated that to provide income in retirement of £20,000 per year, ignoring inflation for the time being, and assuming a return of 5% after charges for both the growth on your money being invested BEFORE retirement and for the annuity income you receive AFTER retirement, that to provide £20,000 per annum you need a fund of £400,000 (£20,000 per annum divided by 0.05).

So to achieve this income goal you need to build up a fund between now and retirement of £400,000. Logic says that we simply divide the fund needed between the number of years to retirement and this tells us how much we need to save each year – in this example £400,000 over 30 years requires a saving of £13,333.33 per year (£1,111.11 per month)

This however doesn’t take into account the growth that you would enjoy on each contribution being paid into the investment vehicle – the contribution made in month 1 would have the longest time to grow – 29 years and 11 months, the contribution made in month 2 – 29 years and 10 months and so on…….

Compound Growth and Regular Savings

Saving on a regular basis into an asset-backed investment, such as a pension fund, or a unit trust held under an ISA umbrella, can benefit from “pound cost averaging”. In a volatile stock market, such as the one we are currently in, investing on a regular monthly basis means that you effectively have 12 chances each year to invest some of your money into the stock market on a day when the market is lower than on other days. The benefit of this is that it brings down the average cost of the units you hold, and ultimately leads to a larger potential profit at the end.

In our example above we calculated the monthly contribution required to build a fund of £400,000 assuming no growth

If we add in say net annual growth of 5% after charges (which should be achievable over the medium to long term) then the monthly investment actually falls to £480.62 per month.

If the rate of growth increases to say 6% per year, the monthly investment falls to £398.20 per month.

If the rate of growth again increases to say 9%, the monthly investment required to hit £400,000 falls to £218.49.

The Cost of Delay

Above we calculated that £480.62 invested at 5% net per annum will grow to £400,000 over a 30 year period. If we reduce the term to 29 years, then to achieve the same fund value, the monthly investment needs to be £512.77 per month – an additional monthly investment of £32.15 or an additional total investment of £11,188.20 over the life of the investment. This shows the cost of delay.

So by waiting one year, an additional £32.15 per month needs to be invested, each and every month for the whole 29 year period, to provide the same £400,000 fund at age 60.

If the individual were to delay their regular savings by 2 years then a monthly investment of £547.63 would be needed – delay by just 5 years and the monthly contribution rises to £671.69 which is probably beyond the means of most families with average income and outgoings.

Starting Early

We have now calculated that the regular saving to build a fund of £400,000 over 30 years, at 5% net return per annum, would be £480.62 per month – but what if you were to start earlier?

If you had the foresight to have started last year, and therefore have a period of 31 years over which to make this investment then this monthly investment would fall to £450.90 – start 5 years earlier and the monthly investment would need to be £352.08……………….

Conclusion

In conclusion then it is vitally important that you start saving as soon as possible for retirement income – whether that be through a personal pension, stocks and shares ISA, a deposit account…….

Start as soon as possible!

Ask yourself this question – how many more paydays until retirement? – 30 years – another 360 payslips – it’s later than you think!

Related Article:

Buy a Financial Calculator

20Mar 2009

State Pension – how much will YOU get?

by shrewdcookie ⋅ Leave a Comment

The State Pension is provided to those people who have made or been credited with sufficient National Insurance contributions during their working lives.

When do I get my State Pension?

State pension age is currently 65 for men and 60 for women, however, changes in legislation have been introduced to equalise retirement ages for both men and women to age 65 by 2020, increasing gradually from 2010. Women born between 6th April 1950 and 5th April 1955 will have a State pension age somewhere between 60 and 65.

Thankfully, the Pension Service have provided a State Pension Age Calculator on their website.

Will it Stop there Though?

No. In the UK we are suffering from the effects of an aging population. Todays pensions are paid out of todays National Insurance contributions. Over time the size of the working population will fall and the size of the retired population will rise.

Between 2024 and 2046, State retirement age for both men and women will rise from 65 to 68.

How Many Years to Qualify?

Your National Insurance record needs to show the following level of service

49 years for men

44 years for women born on or before 5 October 1950

45 years for women born between 6 October 1950 and 5 October 1951

46 years for women born between 6 October 1951 and 5 October 1952

47 years for women born between 6 October 1952 and 5 October 1953

48 years for women born between 6 October 1953 and 5 October 1954

49 years for women born on 6 October 1954 or later

How Much Will I Get?

The actual amount differs from one person to the next – did you know you can request a State Pension Forecast – simply complete form BR19.

How do I Claim my State Pension?

You will normally be sent a letter 4 months before your State retirement date although you should contact them if you haven’t received a letter from them 3 months prior to retirement – you can claim over the phone 0800 731 7898 .

Will I get Other Pension Benefits from the State?

Again, depending on your own particular circumstances, you may qualify for additional pension in the form of SERPS or State Second Pension. The rules are complicated and it is beyond the scope of this article to discuss SERPS and SSP in any great detail.

What Action Should I Take Today?

It would be prudent to work out your State pension date to allow you to plan your income and expenditure in the lead up to retirement – use this calculator.

More importantly, you would be wise to ask the Pension Service for a State Pension Forecast – simply fill out and send off their form BR19 (1.17MB) or call them at the Future Pension Centre on 0845 300 0168 . If you are hard of hearing or have speech difficulties they also offer a Textphone facility – 0845 3000 169.

We will discuss SERPS, Second State Pension etc in more detail at a later date.

Tag Archives: Retirement Planning

Change in Personal Pension Retirement Age – Act NOW!

A few interesting blog posts you might like

Top 10 Personal Finance Articles – September 2009

Personal Pension? – Minimum Retirement age 55 from 6th April 2010!

Top 10 Personal Finance Articles – August 2009

Buy a Financial Calculator

Retirement is an income, not an age

Instant Returns on Pension Contributions

It’s not how much you save, but how long

State Pension – how much will YOU get?