I was listening to Radio 4’s Thought for the Day earlier on, where a Baptist minister was talking about the sensible, risk averse people having to bail out the more foolish, risk takers. Bail outs are not universally popular, but one thing in particular that he said stuck out to me. He said that he has his whole fortune safely in a building society.

are building societies safe?

Of course, you’ll all be aware that building societies are not intrinsically safe. Your money is only as safe as either the institution you’ve put the money in, or if that fails, the extent to which it’s guaranteed by a government scheme such as the Financial Services Compensation Scheme.

When you hold money in a building society, you hold it in cash, and cash has its own risks. There’s the risk of inflation eating away at your money, and the opportunity cost - the chance that you could have done better with your money elsewhere.

do you have money elsewhere that you forget about?

I suspect that the Baptist minister in question doesn’t have his whole fortune safely in a building society. I can’t be certain but it’s likely that he expects to enjoy a ministers’ pension when he retires, he’s probably contributing to one right now.

what do pensions have to do with anything?

Well, work and personal pensions are part of your fortune. Especially if you are planning on retiring one day on more than the state pension. Final salary pensions are much sought after, because they offer great benefits to retirees. But those benefits need to be paid for.

You might think that if you have a final salary pension, it comes with some sort of cast iron guarantee. But it doesn’t. There’s only one place that the money that you pay in can grow into enough to pay out, and that’s in investments. Regardless of the type of pension that you have, there’s no secret money cupboard.

If you have a final salary pension, then the trustees and the scheme actuaries decide where how the money should be invested - usually in stocks, bonds, cash and property - and try to ensure that there will be enough money to cover everyone’s pension. That’s why a lot of schemes are asking members to contribute more, for the same or lower pension when they retire. If they don’t, there isn’t going to be enough money to pay everyone’s pension, because money doesn’t grow on trees.

If you work in the public sector, the taxpayer could be forced to pick up the tab if there’s a shortfall, but don’t count on everyone else voting for that.

If you have a money purchase or defined contribution pension, then you can directly control your investments. You should take the opportunity to learn about risk and investing, but there’s probably a default set-up that is at least vaguely appropriate.

maybe I shouldn’t invest?

There is always the risk that your pension might not be worth as much as you hope, but it’ll  be better than nothing, and it’s very likely to be better than just sticking the money in a building society, as there are tax breaks, (and often employer contributions) for using a pension wrapper.

Nearly everyone is invested in risky things and it’ll probably turn out ok. In the long run. Don’t use the current economic climate as an excuse for delaying your investing.

It’s similar with investing. It’s basically a given that stock markets act irrationally. When the stock market is rising, everyone thinks that buying is the right thing to do, and prices go up - beyond the point at which things are reasonable. When the stock market is falling, everyone thinks that selling is the right thing to do and prices plunge further. The typical novice investor intends to buy low and sell high, but in reality does the exact opposite; buying when everyone else does (when prices are high) and selling when everyone else does (when prices are low). Not really the way to get where you’re planning on going.

fear of investing is all around us

The stockmarket took a huge dive in 2008. I’ve (on paper) lost all the money I invested last year, and another 10%. It would be easy to let recent losses cloud my judgment and for me to lose confidence in the underlying basics. I’m certainly naturally inclined to retrench slightly and pull back from dangerous positions. After all, no one wants lose, and we certainly don’t want to throw good money after bad.

If you’ve looked at your pension recently, it’s certainly tempting to think that your future contributions would have better spent your wallet, or even in your emergency fund. But don’t lose out on one of the best returns you’re ever likely to make.

employer matching contributions

If you have a retirement account or pension through work where your employer contributes money if you do, then this should always be taken advantage of wherever possible.

At my place, if I contribute 2% of my earnings to a pension, then my employer will add 4% of my earnings. What’s more, this is all pre-tax. There’s no other investment where I get an instant 200% return. What’s more, it’s taken directly out of my pay so I never even miss the money.

Maybe your job isn’t quite as generous, but if there’s any contribution match at all on offer in your retirement account or pension, always take advantage of it if you can. Your future self will be really and truly grateful.

I ended up with approximate figures of £150k in income after tax since the age of 18 (including wages, bonuses and major gifts) and a net worth of about £12k (depends on share prices so could well be less, but good enough for an approximation). This means that of all the money that has come into my hands as an adult, I have about 8% of it left.

That’s not a lot, especially when you consider that since I graduated, I’ve saved about 20% or more of each pay cheque. To be fair, I assumed that house prices have gone down, and my house is now worth as much as my mortgage, whereas I had a £10k deposit. Also, although I save quite a bit of money each month, some of that is planned savings for specific things like travel, or home maintenance.

Still, to see how I’m doing in the great scheme of things, I calculated my anticipated earnings across my lifetime (assuming only that I get a cost of living increase each year). This came out as £2.6M, but the pot of money that I need to retire on is nearly £1.7M. I need a net worth to total life income ratio of approaching 65% in order to retire.

I’m not panicking yet though. One of the key factors in becoming wealthy is allowing time for the magic of compounding to take place in a good way. A lot of the planned for growth in my net worth is going to be caused by earning interest on the interest rather than me saving three quarters of my income. Although saving more probably wouldn’t hurt.

Anyway, has anyone else done this exercise or something similar? And if so how did your numbers come out?

Guess what I discovered.

If I maintain my current contributions (increasing them only with inflation) I’ll be able to retire a full 10 years earlier than I originally expected, providing that my annual investment return is about 4% above inflation. Of course I intend to ramp up my contributions rather than keep them relatively level as I put half of every pay rise into investments.

To me, this is quite exciting news, especially as the new possible retirement date is actually about the time that I’ll have paid off the house. And of course, my definition of rich is not having to work for a living.

sharing my retirement calculator

I know that some of you are also spreadsheet fans, so if you’d like to have a play with my retirement calculator then why not download it?

It’s all zipped up for you and works in both Excel and also the free Open Office spreadsheet program. If you spot any bugs or flaws please let me know.

You can tweak quite a few variables to come up with different scenarios, I hope you like it

I know that you’re all sensible people who have this figured out, but I’ll just remind you that I’m in my late twenties, have been investing for retirement since I left university and I will need to keep putting around 15% of my salary away every year just so that I can retire with the same income that I have now.

There are people who think that they can’t afford to invest for retirement. Trouble is, the way I see it, you’ll have to cut back at some point. Money doesn’t grow on trees, and you can either cut costs now and invest or try and live on the state pension in your retirement. Do you know how much that is? The current minimum income guarantee is £124.05 a week. That’s only £6,450.60 per year. That’s really and truly not an awful lot of money - and it makes the assumption that there will be enough money to support that when you retire.

If there’s more than 10 years to go until your retirement you should start seriously putting away money now. (If you have less than 10 years, you might want to check out my series on baby boomers without pensions.) I think that a rough rules of thumb of 15% of your gross salary and/or as much as you can afford should be floating through your mind.

It’s really not rocket science. If you’re in the UK, get a Stocks and Shares ISA, or a stakeholder pension, or some other simple tax-advantaged investment vehicle. And put the money away, or you could be old and ill and choosing between heating and food in the winters.

I do have a little spreadsheet, that tracks my pension contributions, and investment balances and gives me an inflation adjusted projection of my retirement income. (What can I say, I’m a spreadsheet geek.) It’s currently suggesting that I’ll be ok to retire when I’m 68. I’ll be rich enough to have an income that’s about what I have now, assuming that I’ll have paid off the mortgage by then.

I do put a reasonable amount away that’s earmarked specifically for retirement - currently around 11% of my gross salary. My combined investment amount this year is likely to be around 16%-17% of my gross income. This is marginally more than 2007, and I’m hoping to increase it more each year if I can.

The rule of thumb is to contribute 10% of your income, and although I’ve had a pension since I left Uni, I’m not sure when I started contributing more than 10%. But then, I don’t know if 10% is going to be a good rule of thumb for me. I’m pretty sure that you’re supposed to start with what you want retirement to look like, and then work from there, but I honestly can’t really imagine it.

I’m not anticipating taking early retirement. Compared to many of my m-network friends I have quite a conventional career/life thing going on. David @ my two dollars works for himself in various online ventures, Mrs. Micah has a patchwork career, being frugal and paidtwice are both pro-bloggers/SAHP/loads of other great suff, Patrick @ cash money life, pinyo @ moolanomy, gibble @ gather little by little, single guy money, and the doughroller are all heavily into alternative income (or have aspirations that way). I’m just well, me.

If things continue as they are for me, I’m likely to work (at a job I like) for a number of years, and then just retire when I can afford to. Pretty traditional and conventional. I absolutely don’t mind this at all, it’s just that without envisaging a kind of semi-retirement, it all seem such a very long way off. I am likely to be at least twice the age I am now when I retire, after all.

Because I’m sensible, and because I have no intention of being a poor old person, I’m dutifully putting away a good proportion of my money into retirement. Only enough that will do for retiring at 68 though. I just can’t get excited enough about retiring to work harder on it.

What do you think? Are you working towards early retirement or semi-retirement? Or are there other conventional people like me out there? Let me know in the comments.

Image by Tracy O

I could have sworn that I’d written a very similar post to this before, but I couldn’t find it. In any case, I get asked quite a few questions about expat finances from British people living overseas (especially the US) and I know that a few readers are expats living in the UK. I thought this information - whose discovery was inspired by a conversation I had with a friend the other day -  might be useful to you. 

Did you know that British National Insurance scheme (the one that qualifies you for your state pension) is reciprocal with a number of other similar schemes in other countries?

This means that if you are British and you work abroad you might be able to use your contributions there to qualify for a state pension over here, and vice versa.

The rules vary from country to country, but for example, if you have worked in the US and you haven’t paid NI for enough qualifying years to get a full British pension, you can treat the time that you spent paying Social Security to qualify. The amount you would get would be based on how many years you paid into both schemes, and the proportion of time you spent in each scheme.

Suppose you spent 10 years working and paying NI in the UK, and 20 years working and paying Social Security in the US. In the UK, they would calculate how much pension 30 years contributions would give you and pay one third (10/30) of that. In the US, they would calculate how much pension 30 years contributions would give you and pay two thirds (20/30) of that.

It works pretty much the same, as the agreement with the USA for all the countries in the EU - except of course that you could have worked in all 25 (or more) of them.

For Britons living in Canada, if you are not entitled to Canadian Old Age Security pension, you haven’t lived in Canada for more than 20 years, and you live in the UK for the 10 years prior to your retirement, your time in Canada is treated as if you paid contributions to the UK.

If you spent time in New Zealand, but return to the UK to retire, any time you lived in New Zealand will be treated as if you paid contributions in the UK, for the purposes of qualifying for the British State Pension.

Similarly, if you retire in New Zealand, any time you lived in the UK will be treated as if you paid contributions in New Zealand for the purposes of qualifying for New Zealand Superannuation. Any money you receive from the UK will be deducted from your Superannuation though.

If you are living in either New Zealand and Canada (or most other countries), once your State Pension starts being paid out it there will not increase. You can get more details from the Department for Work and Pensions, where you can also find information on the other reciprocal agreements with:

• Barbados
• Bermuda
• Israel
• Jamaica
• Jersey and Guernsey
• Mauritius
• Philippines
• Turkey
• Yugoslavia (and former republics)

Image by mandj98

Chris emailed me the following question:

Can my company insist on my retirement at state retirement age or do I have the right to continue my employment?

The answer I’ve found (via the TUC) is that unfortunately, yes, your employer can insist that you retire at state retirement age, but only if the company’s normal retirement age of 65 or above. They cannot make you retire younger than 65 as that’s against age discrimination legislation. It’s possible that making you retire at 65 could be found to be against EU law, but that hasn’t been tested in the courts.

On the positive side, it has become easier to work past your normal retirement age. If you have a company pension, you no longer have to leave your job to get the pension, although whether you can draw some or all of your pension whilst working for the same employer will depend on the rules of your scheme. (More information on working after retirement.)
If you want to carry on working past state retirement age, you can defer your state pension and either get a larger pension when you do decide to start taking it, or get a taxable lump sum (with interest) to cover the pension that you didn’t take. (More information on State Pension Deferral.)

If you’ve got any questions, please feel free to contact me, and I’ll do my best to find an answer for you.

Image by mugley 

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:

• Introduction: Financial Strategies for Infants and Young Children @ My Dollar Plan
• Preschoolers: Teaching Preschoolers About Money @ I’ve Paid for This Twice Already
• Children and Pre-Teens: Personal Finance for Children and Pre-Teens @ Being Frugal
• Teenagers:
  • Teach Your Teen the Basics of Money Management @ Gather Little by Little
  • Money Advice to My Teenage Son @ DebtFREE-Revolution
• College Age: College Money Matters @ Mrs. Micah
• The Twenties:
  • Money Matters for All Ages - The 20’s @ Cash Money Life
  • Financial Advice For Your Twenties @ Remodeling This Life
• The Thirties:
  • Money Matters for All Ages - The Chaotic Thirties @ Moolanomy
  • Personal Finance Advice For Your 30’s @ My Two Dollars
• The Forties: The Forty Year Old’s Wakeup Call @ Credit Withdrawal
• The Fifties:
  • You’re in Your 50s - Wake Up and Start Saving @ Millionaire Money Habits
  • Retirement Objectives in Your 50’s @ Credit Withdrawal
• The Sixties: Easing into the Golden Years- the 60’s and Beyond @ Chance Favors the Prepared Mind
• Retirement: The 4% Retirement Rule @ Quest for Four Pillars and retirement in the UK  @ plonkee money

start now

If you haven’t got any retirement plans in place, then do something about that today.  None of us are getting younger, and we all need to make plans as soon as possible.

invest in something sensible

Do no invest in something that sounds too good to be true, there is no get rich quick scheme. Of course, some people do get lucky, but whilst I appreciate the vagaries of randomness, I don’t want to rely on it to stop me from working for the rest of my life.

A corollary to this is that sensible is usually boring. Boring is good when it comes to the money.

repeat

Keep going. Don’t give up your saving and investing. The more you put in, usually the better off you will end up.