Pensions: Thinking ahead

I'm Fergus Muirhead and I'm here to answer any questions you may have about any money or consumer issues.

Please drop me a line at with your questions. You can also read more on money and consumer issues on my own blog.

Pensions are in the news again and I thought it worth sharing this email from a young listener who is obviously thinking ahead.

I've followed it with 10 tips to make sure that you are planning properly for your own retirement.

Q. I am an 18-year-old undergraduate student and have numerous savings. I have a part-time job while studying at university. In the current economic climate and uncertainty about the jobs market, do you think it would be worthwhile opening up a pension now so that at least I have something started when I leave university? Something like a stakeholder pension only requires at least a £20 investment per month. Please give me your thoughts on this matter- it's just we are all told to start early! Jack Fraser

A. It's a really good question, Jack. I've just read an article in one of the papers telling me that more than 25% of people are going to retire with nothing but the state pension to live on, so the fact that you are starting to think about making some sort of pension provision so young is great. As you rightly say you can start to invest into a Stakeholder Pension with as little as £20 per month and that will be increased when it is invested since your pension company will reclaim basic rate tax on each £20 you invest.

The benefit of starting to invest in a pension now is that you will be saving (at least under current legislation) until you are at least 55 which means that your money has at least 37 years to grow, and it will grow in a fund that is, at the moment at least, mostly tax free. So the pluses of investing in a pension at the moment are that you should benefit from long-term growth (although the market is fairly fluid at the moment and you may see some short-term losses if you invest in particularly adventurous funds) and that you will receive tax relief on any investments you are making.

The downside is that you will not be able to access your cash until you are at least 55 - or maybe older if legislation changes between now and then - and you will not be able to have all of your cash back as a lump sum. Currently you will be able to take up to 25% as a tax-free cash sum with the balance being taken as income.

Of course when you start work you may find that your employer offers a pension scheme, at which point you may want to move the Stakeholder Scheme you are thinking of setting up now into your employer's scheme, partly to make it easier to administer going forward and partly because it might be easier to manage the investment strategy you adopt via one plan rather than two.

It is also the case that stakeholder pensions are flexible enough these days that you can change the level of investment that you make to cope with your own circumstances so that if you need to stop investing for a while because you are not working then you can take a break from your pension and pick it back up again when you start to work.

The amount of money you can invest is dependent on your income on a year-by-year basis so you will have the flexibility to increase or decrease as your income changes.

Here are 10 tips to make sure that you are planning properly for your own retirement:

1. It's never too early to start planning for retirement

Don't think it's clever to wait until it's nearly time to retire before you start to think about your pension. The sooner you start to plan for retirement then the more money you will have in the pot when the time comes to retire.

2. Retirement planning doesn't mean the same as pension planning

While there are obvious tax advantages to pensions, it makes sense to have as wide a spread of investments as possible - and that means money in the bank as cash, perhaps a share portfolio and, for most people, property that can be sold as part of a downsizing exercise as you get closer to stopping work.

3. If your employer offers a pension, join it.

Most occupational pension schemes involve your employer making a contribution on your behalf. It may be structured in such a way that they will match your contributions up to a certain level, so if you pay 5% of salary so will they. It's free money, don't turn it down.

4. Pensions are tax efficient - use that to your advantage

Under current legislation you can invest 100% of your salary in a pension, up to a limit of £50,000 this tax year, and claim tax relief on these payments at your highest rate of tax. So every £1,000 invested in your pension is effectively only costing you £600 if you are a 40% tax-payer and £800 if you pay tax at 20%. On top of that, you can take up to 25% of your pension fund as a tax-free lump sum when you retire. The icing on the cake is that pension funds don't pay much in the way of tax so growth will be faster than in an equivalent fund outwith a pension wrapper.

5. Stopping work and taking a pension are not the same thing - be flexible

Just because you have started to take your pension doesn't mean you have to stop work, in fact it is possible to be taking income from one pension while still paying into another. Flexibility is the key here and it is important to make sure that your affairs are planned in such a way that you are not shutting down your options at retirement.

6. Use your pension to buy commercial property if you run your own business

It is possible, and extremely tax efficient to use your pension fund to buy a property that you can rent back to your own business. The pension can actually borrow money to help fund the purchase - under current legislation up to 50% of the value of the fund, and the rent that is then paid by your company to the pension fund can be used to repay the loan.

7. If you are over 40 a pension is not a long term investment

One of the main reasons that people put off investing in a pension is that it is seen as a long-term investment. Once you are the wrong side of 40, however, then you are only 15 years away from being able to start taking money out of your pension so it is no longer a long-term investment.

8. Ask the Pension Service for a forecast of your likely benefits

You can write to the Pension Service at and ask them to provide you with a statement of projected state pension at retirement.

9. If you've got spare money, start a pension for your children

The limit that applies to pension contributions is 100% of income up to £50,000 this year. The most that you can pay into a pension without any income is £3,600 and this can be done from any age. So it is possible to start building up pension funds for your children as soon as they are born, and qualify for tax relief on payments even although they don't pay tax. It's not what the government meant to happen but the rules currently allow it.

10. It won't just happen - you need to make it happen. Have a plan.

People don't plan to fail, they just fail to plan. There are tens of thousands of people in this country who are currently working past the date by which they would liked to have stopped work, simply because they have not make adequate pension provision. Don't let it happen to you. Make a plan and start it now.

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