Money Matters

We’re always being told to start saving for retirement early but how do we do it? Mike Fosberry, director at Smith & Williamson the accountancy and investment management group, ran me through a few of the things people should be doing this morning:

1 Start early. This could mean grandparents funding pensions for grandchildren.

2 Don’t rely on the State. This is because state pensions are expected to fall in real terms due to demographics and the fact that they government cannot really afford to keep funding them.

3 Make sure the investment strategy for your pensions fits your investment risk profile. Equities may be entirely appropriate if you have a long investment timescale but inappropriate if , for example, you are planning to buy an annuity within the next 5 years

4 Open market annuities. If you are planning to buy an annuity when you retire make sure you take advantage of the open market option to secure the best terms as in some cases this could improve your retirement income by between 10 per cent to 20 per cent.

5 Charges. Beware of the impact of charges in your pension plan on investment performance so take the time to understand how much you are being charged

6 Employer pension scheme. If your employer offers a scheme where your contributions are matched by their contributions make sure you take advantage of this. We come across many corporate sponsored schemes where membership levels are low simply because employees do not understand the significant benefit to them of matched contributions.

7 Tax relief. Remember that for most people tax relief is available at their marginal rate of tax so take advantage of this tax subsidy to boost the immediate return on your investment by up to 40 per cent in the current tax year

8 Make sure your pension contract is flexible. For example does it allow you to invest in a wide variety of pension funds but beware how much you might be paying in additional charges for such flexibility. Also make sure that there are no penalties in your pension arrangements if, for example , you retire earlier than planned.

9 AVCs. There are now very few Company sponsored defined benefit schemes available to employees so if you are a member of such a scheme it is highly attractive unless your employer is in financial difficulty. Where your employer pays into a defined contribution scheme on your behalf consider paying AVCs to boost your pension as they are tax efficient and in the majority of cases the underlying charges will be very competitive and lower than those you would pay if set up your own pension plan.

10 Extra income If you receive unexpected capital perhaps as a result of an inheritance consider using at least some of it to boost your pension fund as this can be highly tax efficient.

To read more on retirement savings and pension planning go to our pensions page on this subject