BBC NEWS Americas Africa Europe Middle East South Asia Asia Pacific Arabic Spanish Russian Chinese Welsh

 You are in: Business
Front Page 
UK Politics 
Market Data 
Your Money 
Business Basics 
Talking Point 
In Depth 

Commonwealth Games 2002

BBC Sport

BBC Weather

Friday, 23 November, 2001, 16:52 GMT
How can I retire comfortably?
Pensions in crisis
Diversify your investments to spread risk
Sarah Toyne

Longer life expectancy, falling stock market returns and paltry annuity rates are causing growing concern for people looking forward to an active and fun-filled retirement.

A report from The Association of Consulting Actuaries (ACA) concludes that many people need to increase their pension contributions to ensure that they will have enough to live on.

ACA focused on money purchase schemes, which are becoming the most popular type of scheme offered by employers.

Its report concludes that someone in their mid-30s needs to save 15-20% of their annual salary into a money purchase pension to get a retirement income of around 60% of their salary.

For people aged 40, the figure rises to 17-25%, and for those who are 45 when they first take out a pension, they need to save 23-30% of their annual salary.

Should I invest in a pension?

If you want an enjoyable retirement, it is important to start saving - and the sooner the better.

The government provides only minimal help in retirement as many of today's pensioners have discovered.

This position is unlikely to change. With an ageing population, the government is also concerned about a growing pensions bill.

One advantage of investing in a pension is that your contributions attract tax relief.

For basic-rate taxpayers, every 78p invested is topped up to 1 by the government; for higher-rate taxpayers, a further 18p is added.

Many people, for example those on low incomes or non-earners, have been prevented from saving into a pension in the past.

But stakeholder pensions have now been introduced which is a straightforward and viable way for many ordinary people to save money.

Pension disadvantages

Concern is not only restricted to money purchase schemes.

Final salary schemes have been seen as comfortable ways of saving for old age.

They are supposed to guarantee a set income based on two factors: years of service and final salary.

However, there is concern that some companies may not be able to afford to pay out their liabilities in the future.

The National Association of Pension Funds warned earlier in the year that these schemes could run out of money.

If you are concerned about your pension or scheme, read: "Pensions: What you need to ask".

Despite those ominous warnings, most people should invest money in either a stakeholder or a company pension scheme - largely because of the tax advantage.

How do I contribute more?

Most company schemes offer an in-house facility for additional voluntary contributions (AVCs).

Alternatively, you could invest in another company's scheme through free standing additional voluntary contributions (FSAVCs).

The charges for FSAVCs are often higher than those involved paying AVCs through your existing scheme.

The government imposes restrictions on how much you can save in a pension each year.

In a company scheme, an employee can pay in up to 15% of gross salary in addition to the employer's contribution.

Personal pension contribution limits start at 17.5% of earnings for employees up to age 35, rising in stages to 40% for employees aged 61 and over.

Alternatively, if you earn less than 30,000 a year, you can pay into a stakeholder pension as well as contribute to a company scheme, but you must stick to the appropriate investment limits.

Spread risk

One of the golden rules of personal finance is to diversify investments and spread risk, so it may be worth looking at other ways of saving.

One tax efficient way is by investing in an individual savings account (Isa).

Anyone over 18 can invest up to 7,000 a year in an Isa. You can either invest your whole annual allowance in the stock market, or you can keep up to 3,000 in cash.

One advantage of an investing in an Isa is its flexibility - you can withdraw money as and when you like.

There is also a tax advantage - any profits you make are tax-free which is good for anyone who is liable to pay income tax.

Unlike pensions, however, you do not get tax relief on your contributions.

Bricks and mortar

More people are investing in property to boost their retirement income.

Investing in property has two main attractions.

As well as earning rental income, your property should increase in value.

However, investing in property can be risky.

You may have problems with tenants, or need to fork out on expensive renovation and repairs.

You may also have problems renting the property.

There are also more immediate concerns. A number of recent housing surveys have indicated that, in many parts of the country, house prices have begun to stagnate after years of rapid growth.

There may be a danger that you could be buying at the top of the market.

Before you go ahead, it is essential to research the area thoroughly and talk to local agents.

Try the Land Registry's website to get an idea of property values, while provides a range of information from demographic information to crime rates.

You must also remember that while mortgage rates are very low, they may well go up in the future.

The other problem with investing in property is that it is an "illiquid investment".

In other words, it will take time to get your hands to turn capital in your property into ready cash.

Easy way to make money

Many money people are wasting money that they could be using to save for their retirement.

Ask yourself: Are your savings languishing in a poor-paying account and have you switched mortgage rate recently?

Each year, thousands of people waste money by leaving their savings in accounts offering low rates of interest, or by paying over the odds for their mortgage.

One of the biggest ways homeowners can make money is by remortgaging to a cheaper rate.

Someone with a 100,000 repayment mortgage and paying a standard variable rate could save thousands by switching to a cheaper deal.

For example, switching from Abbey National's variable rate of 6.1% to a Kent Reliance two year discount deal, with an initial rate of 3.73%, would save you 145 a month or more than 3,400 over two years, assuming that rates stayed the same.

Switching to Abbey National's 5.19% five year fixed would reduce monthly payments from 658.10 a month to 595.71 a month.

If you switched from Abbey's 6.1% rate, you would save 62.39 a month or 3,743 over five years, assuming rates stayed the same.

See also:

15 Oct 01 | Business
Trouble in pension land
04 Oct 01 | Business
Q&A: Switching energy supplier
24 Sep 01 | Business
Save thousands off your mortgage
26 Sep 01 | Business
Picking the right mobile phone
21 Aug 01 | Business
Pensions: What you need to ask
30 Jul 01 | Business
Q&A: How to manage debt
17 Nov 00 | Business Basics
Pensions factsheet
Links to more Business stories are at the foot of the page.

E-mail this story to a friend

Links to more Business stories