ACTION NEEDED

In our experience the two key words in achieving a successful retirement are PLANNING and REVIEW.

It is never too early to start planning for retirement. Although you may already have a preferred date in mind you may not appreciate how much you will need to match your retirement income with your retirement needs.

As no two people are the same you will need to try and set out what your own personal requirements are and whether they are achievable. There will be more often than not a need to compromise. How big the compromise depends on your ability to plan ahead.

The first thing to do is to review what you have already got, to make sure it is performing satisfactorily and there are no hiccups when you need to get at it.

PENSIONS

Personal and Occupational Pension Plans

Although state benefits do not start until age 65 except women born before1955 you can take other retirement pensions at age 50 (55 from 2010). Some pension schemes may have additional rules or penalties for taking benefit early. Some may even offer what are called guaranteed annuity rates – a benefit you do not want to lose.

Some may impose penalties for early retirement because they are old style plans with old style charging structures. You may have preserved pensions with previous employers or plans you may have completely forgotten about. Check out how the money is invested. If it hasn’t been reviewed in the last few years, and the funds are predominately stock market funds you could have a nasty shock if there is a crash just before you want to take benefits.

State Benefits

Contact the Pension Service to get an idea of how much your State Pension will be, including your entitlement to the State Second Pension (formerly SERPS). This is quite a simple process involving a form called a BR19.

The pension service will write to you four months before you reach state pension age inviting you to claim. Remember that the government is gradually extending the state retirement ages for women from 60 to 65 for those people born after 1950.

If you don’t need to start drawing your state pension at state pensions age you can postpone it and get either extra State Pension or a one off taxable lump sum payment when you do claim it.

The Pension Service – getting a forecast for your state pension and about deferring your pension.

Contracting out of the Second Sate Pension (S2P)

You may in the past have made a decision to contract out of SERPS (State Earnings Related Pension Scheme) which has now become S2P. Your decision can be an annual choice and as the rules and benefits entitlements have changed you should review whether the decision made previously is still the right one.

Self Invested Personal Pension Plans (SIPPs)

Self Invested Personal Pension Plans (SIPPs) are a type of pension that allow you to take total control of how your money is invested. They can be as complicated or as simple as you wish.

They became popular when business people used the tax efficiencies involved to buy commercial property with the funds accumulated. With the emergence in the availability of investment house funds they are now commonly used as an alternative to Stakeholder or Personal Pension plans. Investors have total control in the choice of funds from all the leading providers. Previously they were restricted to the mediocre funds of one pension provider.

INVESTMENTS

Depending on your circumstances and your attitude towards risk, if you have a portfolio of investments, Bonds Unit Trusts, ISAs or PEPs etc you may want to review it to replace a high level of risk for a higher degree of capital security. You may also want to alter your objectives so that part of it is geared to providing income rather than be designed for capital growth.

Fund Supermarkets

It is impossible for one fund manager or one company to continually produce the best returns year in year out. One of the best innovations in recent times, and enhanced with internet access, is the creation of a Wrap or Fund Platform. These companies act as an administrator whilst offering the choice of all the major investment houses and their most popular funds. So investors could have the choice of over 100 investment houses and 1000 different funds all under the one roof. If one fund manager doesn’t perform you simply switch internally to another manager and another fund at little or no cost.

Tax Efficiencies

It is often the case that high rate taxpayers will become base rate taxpayers and base rate taxpayers become non-taxpayers. All investments should be reviewed to make use of all the allowances which are made available by the government.

Although your investments are now in the right names will that be the case in the future. Should joint name accounts be transferred into single names? Will you use up all your allowances?

MORTGAGES & ENDOWMENT POLICIES

Many people plan to redeem their mortgage by means of the tax free cash from their pensions or endowment policy.

The safest, surest repayment method would be by means of a capital and interest mortgage when you know exactly when it will be repaid with the knowledge that there are no external risks involved provided all payments are made on time.

In the 1980s and 1990s Endowment policies were a favourite method of mortgage repayment but due to many different reasons they will not now reach the target amount. Endowment providers are obliged to send out letters to clients advising them as to whether the target amount will be reached. If you have received an amber or red warning letter then immediate action and advice should be sought. An additional problem is that the original endowment company might have been swallowed up by a much larger company leaving the original fund as a low priority for the new company. For the layperson, an almost impossible task to check out what future returns will be, and whether it is worth continuing with the arrangements set up 10,15 or 20 years ago.

ISAs or PENSIONS

Both these products are income tax and capital gains tax efficient. If individuals can afford to invest in both of them they should be the first consideration to boost the retirement pot.

This chart explains the main differences between investing in an ISA and making pension contributions

LEGACY PROTECTION AUDIT

One of the main concerns to older people is the ability to leave something for their children. On the other hand people with ageing parents are more concerned with the parents enjoying the fruits of their efforts to the maximum. With careful planning there are ways of avoiding the two greatest threats to their parents lifestyle namely the costs of long term care and the impact of InheritanceTax. Putting off making a decision or looking at all the alternatives really could cost you and your parents when a simple audit of their affaires would produce peace of mind for the future.

WITH PROFITS INVESTMENTS

You could have a considerable part of either your investment or pension fund invested in a With Profits Fund. They have over the longer term provided a low risk approach with better than deposit account returns by means of annual and terminal bonus rates.

Everyone should review their With Profit Fund because: -

1. With Profits funds grow by means of annual bonuses (which are guaranteed) and terminal bonuses (which are not) over the last few years companies have reduced or stopped paying terminal bonuses.

2. The fund is a mixture of different asset classes including fixed interest. The better With Profit returns were obtained in the 1990s when interest rates were high.

3. A significant number of With Profit funds are closed for new business 51 out of 99 companies operating With Profits funds are closed with assets of £85 billion. (FSA report November 2005). A closed fund is not necessarily a poor investment but regulations can restrict how the fund is invested, possibly meaning a larger part is invested in asset classes if restricted or low potential.

4. With Profits providers, to prevent large outflows after stockmarket falls can apply what is called an MVA on the fund value. (Market Value Adjuster). This means that they can apply penalties on anyone wanting to switch funds or make withdrawals. We have known of MVAs being 30% of the value of the fund.

USEFUL LINKS

Pension Tracing Service – Trace any pensions you may have lost track of.

Pension Calculator - see what you might receive .

New Pension Rules from April 2006

FSA factsheet – Retiring soon what you need to do about pensions.