Short-term woes prompt renewed focus on the future

Published on Friday 7 August 2009 19:41

THE financial crisis may have wreaked havoc on retirement plans, but the wake-up call has jolted savers into action, research published today claims.

A third of British adults have started saving more since the recession began, according to Friends Provident's Generation Recession report. It said the economic woes of the past two years had made many people realise that they need to reduce their debt and put more aside for the future if they are to continue enjoying their current lifestyles.

The uncertainty of the economic climate and the drop in house prices has particularly offered a reminder of the value of planning for the future. No longer comfortable with relying on their property to fund their retirement, more people are going back to basics – saving and investing money regularly over the long term to build up a retirement fund.

Beginning that process can be a daunting prospect and knowing where and how to start is often the hardest part, so here is a brief guide to kick-starting your pension investments.

Save regularly

Drip-feeding money into savings or investments not only makes it less daunting than ploughing large sums in, but it makes financial sense.

Most people find that the best solution is to do both, said Derek Smith, director at Edinburgh IFA Melville Hutchison

"Get into the habit of saving monthly and this can be supplemented by annual additions depending on how much cash you have spare."

This also maximises the benefits of compounding, which means that even modest rates of growth can add up to significant gains, he added. "For example, if your money grows at 7 per cent a year you will double it in just ten years; so by putting away regular amounts of cash you can build up a significant fund."

Take advantage of pensions

A big bonus of investing in any pension plan is the tax relief. Contributions are eligible for basic rate tax relief of 20 per cent, so for every monthly contribution of 80, the government pays a further 20 in. Higher rate taxpayers get tax relief of 40 per cent on pension contributions, although plans were announced in the last Budget to restrict relief on contributions by people earning more than 150,000.

A company pension plan is a good place to start, where possible, as most employers at least match worker contributions. "If your employer offers to contribute to a pension plan, it is sensible to join – if you don't, it is like giving up part of your salary," said Sue Hussin, investment adviser at Johnston Carmichael Financial Services.

If you have no access to a company pension, or want to supplement one, a personal or stakeholder pension comes into play. Private stakeholder pensions, on which the annual fees are capped at 1.5 per cent, can be started with just 20 invested a month and are easy to set up.

If you want to be more hands-on and have a wider range of funds in which to invest, personal pensions may be more suitable. These can be bought through an IFA or direct from a pension provider, such as an insurer or bank. Most providers offer a wide range of funds within their pensions, details of which, including performance figures and charges, can be found online or requested by phone.

Use your allowance

Stocks and shares Isas (individual savings accounts) offer a similarly attractive tax way to invest. While the tax relief from pensions is on contributions, with tax on income paid later, money paid into Isas is from your net income but you do not have to pay tax when you encash them. Unlike a pension, there is no tax relief on the amount you invest, but there are no restrictions on when you can take income or withdraw capital. Any income received is tax-free and there is no capital gains tax when you cash in your investments.

Take the long-term view

Whether you use an Isa, pension or both, a large chunk of your investments will probably be in funds or investment trusts, giving you pooled exposure to equities, bonds and other assets.

"Remember that, over the medium to long term, stock market investments are likely to produce a better return than cash deposits so the longer you have until you retire, the more you can probably afford to invest in the stock market," said Hussin.

Diversification is all-important. In other words, spread the risk by investing in different asset classes – usually equities, fixed interest, cash and property – and then in a range of sectors and regions. But beware of charges, Smith warned. "If your fund were to grow at an average of 7 per cent and your fund manager charges 1.75 per cent a year, that means a quarter of your fund disappears in charges."

The types of funds in which you invest are dictated by factors including age, risk appetite and how much you have to invest.

Independent financial advice is recommended – to find an IFA near you, visit www. unbiased.co.uk or call 0800 085 3250.