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Aspire to retire?

Whatever your age or life-stage, if you’re interested in pre- and post- retirement planning, then this live webchat is for you.

With us earlier were David Dunn, a director at Fidelity International's Retirement Institute and Tom McPhail, a pensions expert with leading independent financial advisors Hargreaves Lansdown.

Whether you want tips on building your fund, beating the effects of inflation, choosing your annuity, or making the most of tax-free lump sums, please see the transcript below to see what was said.

Transcript

Host: Hello and welcome. David and Tom are just settling and ready to take your questions.

David & Tom: David: Hello everyone, I hope we can answer as many questions as possible today.

Tom: Looking forward to it!

Terry Evans1: Okay, so how can you make your income last longer?

David & Tom: David: There are a number of things you can do. Firstly, how much you withdraw will impact how long your money lasts, so it is wise to be conservative. Secondly, getting the right mix of assets can also determine how long your money will last. In this context it is important to still hold equities in retirement. Also, generally, effective budgeting and monitoring of your spending will help!

John Adams: Are SIPPs worth investing in?

David & Tom: Tom: SIPPs are an excellent way of making the most of your pension but only if you are prepared to take an interest in your investments.

Selena: How can you check how good a provider is when buying an annuity?

David & Tom: Tom: If you go online there are a number of annuity search sites available where you can input your requirements and find the best annuity rate for your needs. So you can use this to check against your existing pension company.

Sharon: With the current confusion from the Govt over pensions are we really better off putting money into retirement funds or is property a better bet?

David & Tom: David: It is important to remember that while property has been a popular investment of late, over the last 25 years the return on equities - excluding dividend income - has been 9.8%. In contrast, the return on property over the same period - excluding rental income - has been 8.2%. The key is to avoid undue reliance on any single asset class.

Tom: A key driver in the property boom has been the imbalance between the supply of property in the form of new builds and the demand from a growing population. In the short term, property prices will continue to be driven by this imbalance, but if you look forward over decades it is important to bear in mind that this equation could shift.

Philip: Hi, I currently manage my own self investment ISA which I hope to eventually use when i retire. Are there any advantages to having a pension fund as opposed to a isa fund?

David & Tom: Tom: ISAs give more flexibility because you can access your capital. By contrast, with pensions there are tight restrictions on how you can draw the money out. The tax breaks on pensions do make them a better deal in absolute terms, particularly for higher-rate taxpayers; the reality is that for most people a balance of the two will be the right answer. If you are keen on self-managing your investments then you should perhaps look at a SIPP (self invested personal pension).

Nick D: I propose to begin drawing my tax free lump sum from my personal pension next year. I want to draw it in equal sums over a 10 year period. Assuming my fund stands at £500,000 when I begin to draw what will be available as a tax free sum? Can I draw it as proposed? Will I have to take other pension benefits or can I defer that?

David & Tom: David: You can take a tax free lump sum of up to 25% of the amount of your fund. It is now possible to take this in chunks over 10 years as you suggest. If you wish to avoid taking any income this is also be possible using an ‘unsecured pension’ (drawdown).

Ian LW: I've got a private pension with just over £100,000 with it. Should I stop contributing to it and open another one to spread the risk. Better not to put all my eggs in one basket?

David & Tom: Tom: The key to risk mitigation is to spread money across investment funds, rather than pension arrangements. The risk of loss through injudicious investment decisions should be the key concern; by contrast the risk of loss at a pension arrangement level - for example, through fraud - is minimal.

David: Absolutely. I would agree with that...

Webbo: Is your pension lost if your employer goes bust? Thanks

David & Tom: David: Hopefully not. Schemes are either trust-based or contract-based. In both instances the monies are independent of the company. However, if you’re in a defined benefit scheme and there isn’t enough money in the fund to meet the liabilities then there may be some exposure. However, even in this instance, the pension protection fund exists to ensure that employees in this position don’t suffer. However, there are limits to the protection available from the fund.

Tom: I agree. Going forwards the risk of pension loss as a results of employer failure has now been significantly reduced.

Derek: If you were recommending investments in a SIPP to a young saver, would you advise funds or single equities - and how often would you have to review each group ?

David & Tom: Tom: That depends on how bold you are: invest to the limit of your capabilities. If you are happy to select funds then do that. If you are comfortable selecting indivudual equities then, by all means,, do this. In terms of reviewing your arrangements, there is no right answer to this question, but the more volatile the investments you choose, the more frequently you should review them. I would suggest the absolute maximum review interval that anybody should adopt is yearly; if you are having fun with the equities, you might even find yourself reviewing them hourly!

David: The over-riding principle is that young savers recognise that they have time on their side and that therefore it is in their interests to invest heavily in equities in the early years. It is difficult for anyone to save their way out of poor returns and therefore maximum exposure to real assets is critical.

Keith: What are the pro's and con's of salary sacrafice in relation to pensions for employees and directors of small businesses?

David & Tom: Tom: Salary sacrifice is an inefficient way to save for retirement. This is because it reduces the amount of national insurance paid to the government. This saving can then be used to increase your pension. So if you can get your employer to agree to it and to give you the benefit of some, or all, of this NI saving then go for it. Be aware that if you reduce your salary it can have a knock-on effect of any other salary-related arrangements, such as users borrowing capacity.

Lina: What if any proportion should be invested in cash, equities and bonds if you are retired and in your mid 60s

David & Tom: David: With retirement increasingly spanning 20-30 years it is important to continue to invest in equities. At the same time retirement is a more unforgiving environment therefore you should not overly exposed to equities. Our analysis would suggest that around 30% is probably the optimal position for most people.

Jon Glover: Over the course of your working life and investing in various pension funds is it reasonable to assume, on average, that your eventual pot will equal 3 times your contributions?

David & Tom: Tom: That's not one I've heard before! I would suggest that a marginally more scientific approach is to spend a few minutes playing with a pension calculator online. This allows you to come up with a reasonably meaningful expectation of the likely return from your contributions.

David: You can try the calculator on the Fidelity site - it literally takes no more than a minute to complete and once you have an initial answer you can play around with the assumptions until you get an answer you like!

Norma Ramsay: I am 60 in June but plan working part time. I know you can defer the State pension and get a better weekly pension or defer for three years and get a lump sum. What do you suggest?

David & Tom: Tom: Deferring your state pensions in exchange for either an increased weekly income or for a lump sum represents a pretty good deal. The government is keen to encourage people to defer their pension so the terms on offer are quite generous. As to which one you should do, the overriding consideration should be which one fits your life pattern best. You might also want to take a view on what your own life expectancy might be. For the long-lived, the increased weekly pension is likely to be a better deal.

David: Pensions Vs ISA. Can you explain (perhaps giving the maths) why you feel that a pension is superior to a ISA for a maximum rate tax payer. Especially in the 20 years after they retire.

David & Tom: David: Please see the earlier answer about pensions versus ISAs. I would add that in practise it is rarely an either / or decision. Despite the attractive tax relief on pensions, many people are reluctant to tie up all their savings because of the restrictions on withdrawals. As such, most people will feel most comfortable with a combination of pension and non-pension savings.

Jane: What does the term equities mean exactly?

David & Tom: Tom: An equity is a share in the ownership of a limited company. When you buy an equity you are literally buying a very small share of the ownership of the company. You then become entitled to any dividends paid by the company to its shareholders as a results of the profits it has made And if the company prospers you will find that the share price (your equity) will also increase in value giving you a capital gain also.

Paul: If I draw 10% of my tax free lump sum each year over 10 years and leave the remaonder invested in equities will the 25% increase in line with the size of my pot (assuming the pot increases by more than 2.5% pa)?

David & Tom: Tom: Yes!

Alan: Hi, I retire later this year. As part of my intended retirement income I have about £120000 invested in Peps and Isa's. With interest rates rising and (I suspect) a fall in world stock markets on the cards, would you advise cashing in these investments and putting them into a high rate interest account?

David & Tom: David: The problem you face is timing. Commonly, one of the mistakes both private and professional investors make is chasing the market's highs and lows i.e. plunging into shares just as markets are at their peak, or about to peak, and vice versa. Unless you are absolutely sure in your forecasts, an alternative approach would be to structure your investments so that they are robust in the face of different market conditions. Our analysis suggests that about 20-30% in higher-risk assets (such as equities, property and commodities) with the balance in secure investments (such as bonds) gives protection in the event of an extended downturn in the markets, as you are not over-exposed to equities but you also have the potential for growth under average market conditions, which would not be the case with cash in a high rate interest account. If you are in any doubt about what to do next, I would suggest that you consult with a financial adviser.

Zoe: I'm 24 and self employed and I don't know what to do about my pension. I'd like to have about £30,000 per year to live on when I retire. What should I do?

David & Tom: Tom: I would suggest you start by visiting a pension calculator so that you can look at the effect that saving different amounts and retiring at different ages would have on your pension pot. I would also caution against excessive conservativism, at your age you should be pursuing an adventurous investment strategy; its fine to take risks in your twenties, much less so in your sixties.

keith: how do I maximise my pension?

David & Tom: Tom: Start young, save lots, invest wisely, review regularly!

Paul: My main pension fund is a 'frozen' With-Profits scheme with Norwich Union -- I am being advised to move it an Norwich Union Personal Plan with a wider range of investment options -- I believe that the transfer value will be key to my decision -- do you have any advice for me?

David & Tom: Tom: Check whether there are any penalties before you do anything. Consider where you would invest the money if you did move it - and whether you can be reasonably confident that you will get a better rate of return as a result of making the move. With-profits funds generally have become much more conservative in recent years, so I think another key question would be whether the investment mix of the with-profits fund - how much it has invested in equities, fixed interest and so on - matches your investment needs.

Milli: I have not bought any shares as yet - what is the best way to start?

David & Tom: David: Generally one of the key principles for successful investment is diversification. This means diversification between different investment classes, cash, equities, property etc. It’s also important to diversify within each asset class. So for example, with equities you can diversify by geography, by industry and size of company. If you have enough money to achieve this then buying directly into shares may be an option. For most people the most effective way to achieve this would be through funds rather than direct investment through equities.

Jonas: Hi thanks for the help. If I save the maximum £14K per year for ISAs(husband and wife) what tax do I have to pay on my ISA income after I retire? What tax would I have to pay on pension income after I retire. I'm a maximum rate tax payer.

David & Tom: Investment withdrawals from ISAs are tax-free. By contrast, income paid from pension funds is treated as earned income for tax purposes. This contrast in the tax treatment reflects the different tax-breaks available on the way-in; ISAs are invested out of taxed income, whereas pensions contributions enjoy tax-relief at your highest marginal rate.

Noel: Hi guys, I am in my mid-twenties, have been in work for a few years and am starting to plan for the future. What should I organise first, setting up a pension or getting a deposit for my first house?

David & Tom:My inclination would be to suggest that as far as possible you split your resources between the two as much as possible. The earlier you start saving for a pension the better and the first few years can make a huge difference. However, I also recognise that for many people getting a foot on the property ladder is a much more pressing concern. Bare in mind that you can start pension savings with relatively small amounts, stakeholder pensions can start from as little as £20 a month.

Michael: Can you please tell me what an annuity is?

David & Tom: An immediate annuity provides an guaranteed income for life in return for a cash sum. Thus the longer you live having bought your annuity upon retirement the better value it will turn out to be. There are two main annuity types; a compulsory purchase annuity and a purchase life annuity. As the name suggests, the former is an annuity purchased within a pension scheme at retirement. The latter is a voluntary purchase that can be bought by anyone, effectively at any time.

Tom: Annuities are widely perceived to be poor value for money, and many people are reluctant to hand over their capital in exchange for this income. It is worth noting that several academic studies have shown that annuities are fairly priced and do provide an effective 'hedge' against the risk of 'living too long' and thus your money running out.

Jimmy McKeon: I have been putting £100 into a Standard Life pension for the last 10 years - I am now 35 and want to know if should keep contributing or look to transfer to another pension provider

David & Tom: Tom: Any pension is better than no pension. The two things to look for are 1) what you are paying in charges and 2) where your money is invested. The Standard Life pension may still be the best investment for you, but it is important to bear in mind that pensions have evolved considerably in the last ten years and so you may be able to get a better deal - even with Standard Life - than the pension you set up ten years ago.

stephen Higginson: I have just sold a property to release capital as part of my pension plans when I retire this year. I am told that putting a lump sum into a high interest savings account, with the intation of skimming off the interest to supplement my pensions not the best way to use the money as the income from the interest is taxed. Whats the alternative?

David & Tom: David: The key issue is whether a high interest account will represent all of your savings or just a percentage of them. If it's the latter then it may be appropriate, however the problem with cash is that it does not tend to keep pace with inflation and - with retirement becoming longer and longer for many people - it is sensible to ensure that some of your assets are still held in investments that will provide some protection against inflation.

James: I'm buying my first home and the mortgage payments are likely to squeeze my income. Is it a good idea to scale back on pensions contributions to get a better first home?

David & Tom: Tom: It's a sensible compromise in the short-term but I would counsel against neglecting your pension funding for too long.

Julian Townsend: How much of an advantage do pensions have over ISA for long term savings - 15 years in my case

David & Tom: Tom: If you are a basic tax-payer then the tax advantage of investing in a pension is marginal relative to an ISA. For a higher-rate taxpayer pensions are generally a more attractive route than ISAs. Only you can put a value on the flexibility which an ISA offers relative to a pension.

Michael: Thanks, do you have any choice as to whether your pension fund buys an annuity? If you do have one, does the weekly income remain the same or vary depending on interest rates?

David & Tom: David: Under the pension scheme you do have to provide an income for life after you’ve taken any tax-free cash lump sum. There are two ways to achieve this. Firstly, buying a compulsory purchase annuity or secondly taking an unsecured pension (income drawdown). In the case of the latter, this is generally only available for those with larger pension funds of more £100,000. If this is a suitable investment for you, then you can leave your money invested and draw an income of 0-120% of the best single life annuity rate.

Caroline : I have an FSAVC I took out whilst employed. I now do freelance work and cannot contribute to it as I am no longer contributing to a company pension. Should I leave it frozen or investigate transferring the value to a personal pension?

David & Tom: Tom: This depends on the level of charges in the AVC, the range of investments available and any penalties you would have to pay to get out. Compare the deal you are getting on the AVC with what you could get through a new personal pension - hopefully this will begin to answer you question.

Host: Unfortunately that is all the time we have for this afternoon. Many thanks for all your questions.

David & Tom: Tom: Thank you for your questions. Hopefully this session has encouraged you to plan for a prosperous retirement. If you want to contact me away from this session then you can do so via the Hargreaves Lansdown website: www.h-l.co.uk

David: Thanks for your questions. It’s always a good idea to consult a financial adviser and if you’d like to discover more about maximising your retirement do visit our website: www.rewritingretirement.co.uk

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