Jan

28

financial goals don’t have to be sensible

Filed Under philosophical | 13 Comments

have your cake and eat itThe other day after work I caught up with a friend of mine over coffee. The conversation turned to my blog - although I write anonymously, a number of people “in real life” are aware that I do have a personal finance blog. In an effort to show her that it wasn’t just geeky spreadsheet stuff I mentioned the carnival of financial goals.

That sparked her interest. She’s quite a bit older than me but like me she’s single and child-free. Three or four years ago she cashed in all her investments and put down a large deposit on a cottage in a small village. Apparently she’s been working hard all this time to pay off her mortgage early, and will be able to do so by the summer. But after that, she said she didn’t really have any financial goals.

Now, in my book, paying off your mortgage early is quite a big financial goal. I was a little concerned that she might have done this at the expense of her retirement investments, but no, it transpired that she has a final salary pension, plus an additional private pension, she’ll probably be pretty well off when she stops working. I was informed that retirement savings should be my financial goal - such a sensible person :) .

In the end, she decided that her next immediate financial goal was to set aside money to spend on herself. To landscape her back garden, travel overseas, take classes,… In short, to experience life and all that it has to offer.

It just goes to show that if you get the basics sorted out, your financial goals can be all about spending money on the things that will make you happy.

Jan

27

pfblogsround 27th January 2008

Filed Under links | 7 Comments

This week I liked:

The M-Network and Friends Money Matters for All Ages series has now finished. Check out the brilliant guide to the series @ My Dollar Plan, and the full line-up:

Jan

25

retirement in the UK

Filed Under retirement | 32 Comments

This post was written as part of the M-Network’s Money Matters for All Ages project. See the bottom of this article for the full list of participants and links to their articles.

same beach, later

If you’re anything like me, no matter how much you love your job, you don’t want to keep working there until you drop dead. Retirement, then, is the destination of choice for a lot of us. But, what might we expect to happen financially at retirement?

state pension

If you’ve been paying National Insurance contributions for most of your working life, you will have built up entitlement to a state pension. There are two sets of rules, one set for those claiming state pensions before 6th April 2010, and one for those claiming on or after that date - this handy calculator can tell you your state retirement age. For more information, visit The Pension Service website and for detailed free advice, contact the Citizens Advice Bureau.

retiring before 2010

You need to have worked and paid NI for between 39 and 44 years - depending on your age, and gender - to receive a full state pension, which is currently £87.30 a week. To receive any you need to have paid NI for 10 or 11 years. You may also be entitled to additional state pension (which used to be known as SERPS) and graduated retirement benefit. You can get a state pension forecast to find out what you are likely to receive.

retiring after 2010

You need to have worked and paid NI for 30 years to receive a full state pension. If you have worked for at least 1 year, you will receive something. Similarly to those retiring earlier, you may also be entitled to additional state pension.

NI credits and using a partner’s record

Each autumn, HMRC notifies people who have a shortfall in their NI contributions, there are a few different ways of making these up.

If you haven’t paid NI for enough years, you may be able to claim home responsibilities protection or credits for years when you were caring for a child or disabled person, claiming certain benefits, on an approved training course, or doing jury service.

In addition if it’s within the last 6 years that you didn’t pay NI you can make voluntary contributions at a rate of £7.80 (in 2007-08) for each week you want to make up - so for a whole year that’s £405.60 to buy an additional years credit.

Finally, if you still don’t have enough contributions, you may be able to make a claim using your partner’s contribution record. If successful you would currently get a pension of £52.30 if married, or £87. 30 if you were the surviving partner.

minimum income guarantee

If you have a low income and you are over the age of 60, this can be supplemented by the pension credit, which you can claim if:

  • you’re single and your weekly income is below £119.05
  • you have a partner or civil partner and your joint weekly income is below £181.70

This will top up your income to those levels. It also means that if you are currently projected to have an income in retirement below these levels, it may not be worthwhile contributing to pension schemes (ISAs may be a different matter). If this is your situation you can get advice from the Citizens Advice Bureau.

final salary pensions

Final salary pensions are employer based schemes which give you an income in retirement based on your salary when you retire, and the number of years you have worked for the company.

The exact rules vary from company to company, and you should contact your pension trustees for the details of your scheme - at least one third of the trustees must be members of the scheme. If asked the trustees must send you an annual benefits statement telling you how much you are likely to receive, the transfer value of the fund to see what you could transfer elsewhere, and the annual report and triennial actuarial valuation. Trustees have 2-3 months to provide this information.

In a typical scheme, for each year you work for the company, you will gain a retirement income of 1/60th of your average final salary. There are usually limits on when you may retire, and some provision for early retirement with reduced payments. For more information, contact the Pensions Advisory Service.

private pensions and money purchase pensions

Private pensions and money purchase pensions are treated exactly the same way on retirement (The pre-1988 Retirement Annuity Contracts are also treated the same way). For each scheme that you are in you may take up to 25% of the value tax-free and either buy an annuity with the remainder, or put it into income drawdown.

buying an annuity

An annuity is a contract with an insurance fund, whereby you give them a lump sum and they provide you with an income for life.

For each pension fund that you have, the process of buying an annuity - called benefits crystallisation - is an irrevocable decision, and so should not be taken lightly.

You do not have to buy an annuity from your pension provider, you can use your Open Market Option instead. For this reason, it may well be worth using the services of an Independent Financial Advisor to search the best annuity rates. Some plans have guaranteed annuity rates and these are often much higher than the market rates - the House of Lords ruling against Equitable Life mean that these rates must be maintained.

Annuity rates will depend upon the market, your age and health, and whether or not you want any survivor income. It is possible to buy either a level annuity or one with an annual increase. You should consider the effects of inflation on a level annuity, what you can buy with £30k at the age of 60 would need £60k at the age of 84, assuming a low 3% inflation rate.

income drawdown

This means that you take an income from your fund and leave the remainder invested. The maximum annual income you may take is 120% of the pension that could have been purchased with an annuity, calculated using the Government Actuary rates. You can only use this option whilst you are between 50 and 75. Once you reach 75 you have to either buy an annuity (which you may do at any time) or use an Alternatively Secured Pension - which is similar to income drawdown but with stricter income limits.

This option is only open to pension funds in a Self Invested Personal Pension (SIPPs), an Executive Pension Plan or a Small Self Administered Pension Scheme. Fortunately, most SIPPs allow you to transfer funds from other sorts of pension. The standard rule of thumb is that this is only worth doing if you have a pension fund of £100k or more - note that £100k would give you an income of something like £4k a year.

For more money matters for all ages, read the rest of the series:

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