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Retirement planning

Vince Smith-HughesUnderstanding pensions can be confusing and complicated - and so Vince Smith-Hughes, expert at Prudential, joined us for a live webchat on retirement planning. Vince has worked in the financial services sector for nearly 30 years and spent several years as an Independent Financial Adviser. At Prudential, he specialises in giving guidance to customers on retirement planning.

Q: Could you explain the difference between stakeholder personal pensions and SIPPS and what sort are better for which kind of person? timeout

A: The difference is there is a cap on stakeholder plans, and therefore charges are usually lower. Personal pensions and SIPPS usually have a wider range of investments but are often more expensive.

It very much depends on what someone is looking for in a pension as to which is more appropriate and a financial advisor will be able to assist you to help determine this.

Q: I'm in my early 20s and haven't started saving for a pension yet. When do you think I should start? I feel like my expenses are so high (mortgage, train fare, food, petrol etc) I couldn't possibly set aside more money. cinnamonstix

A: It's obviously very difficult to save money from what you have said, but it's always worth doing a couple of simple things. First of all, check your national insurance records are up to date, so at least you're accumulating state benefits and also try and join any company schemes if available. I can understand in the current climate and given your current circumstances it's very difficult to save any money, but even if you can't join your employer's scheme try and get in the habit of saving a little money, even if it's in a separate bank account to acclimatise yourself to get in the habit of saving.

Q: When people ask me what my pension plans are, I usually reply "learning to live on less". Jokes aside - how much would an average couple with no mortgage or debt need to (comfortably) live on per year? Grannyknot

A: It very much depends on individual circumstances and so, of course, I cannot say how much you will need in your own situation, but a good method is to sit down and work out what your budget would look like in retirement taking into account the things you would ideally like to do.

Research recently conducted shows the average man will retire on £18,000 pa, so that might give you some kind of guideline. But the best thing to do is to work out what state benefits you'll receive, that'll then give you the shortfall, which hopefully you can plan towards.

Q: I'm self-employed and haven't paid into a private pension scheme. I'm now 53 and plan to go on working as long as possible. I have a property and could downshift - should I just concentrate on clearing my mortgage or should I start a pension? eurggh

A: Clearing your mortgage I always think is a good idea. But there are other considerations - such as, what rate of tax do you currently pay, and what rate you'll be reliable to pay in retirement. Pensions are always a good idea, but if they gain more in tax relief than you are liable to pay in tax in retirement, they become an outstanding investment. Also be careful of some of the pitfalls of downsizing, many people when they look at this as an option, realise they don't like it as much as they thought they would!

Also whilst I admire your ambition of working as long as possible, and without knowing what it is you actually do, be careful as this is dependent upon the work being available and your health continuing to allow this to happen.

Q: I'm OK pension-wise but I do worry for my son. He's in his late 30s, paying a huge chunk for child maintenance for my granddaughter. What little he does have he spends. Right now, he's managing but later on it could be an issue. Can I start a pension fund on his behalf? Or how do I make him see he needs to prepare for the future. He certainly can't rely on the state pension. threesugars

A: You can pay into a pension on behalf of your son; it will be his policy but you will be the third-party contributor. The income tax position will be assessed as if your son has paid it. This actually can be a really good way of passing some of your wealth to your son.

Q: I am in the lucky position of being able to save most of my salary towards a pension. How much can I put in a year, can I get tax relief on all of it and can I choose how long to leave it in the scheme? I am 55. distaffgran

A: You're able to contribute up to the level of your salary into a pension scheme, with a maximum of £50,000 pa. But you can also go back three years and use up any unused allowances. Tax relief is allowable at your highest marginal rate.

You can choose how long you leave it in the scheme, but it may be worth considering starting to draw your pension from 75 at the latest, as any fund will be subject to a tax charge upon death, from this point onwards. If you are in the position to look at substantial contributions, then I strongly suggest you speak to a financial adviser.

Q: I have several bits and pieces of pensions from various employers over my rather erratic career (some of which has been spent self-employed). I am not yet retired. Should I leave all these where they are (I have lost track of a couple of them) or should I consolidate them? firenze

A: First of all you need to locate all of your benefits and there is a pension tracing service available. Go to < rel="nofollow" a href="http://www.gov.uk/find-lost-pension" target="_blank">www.gov.uk/find-lost-pension and this will help you find them.

It's impossible to say whether it's appropriate to transfer all of your plans into one without further information, but certainly be very careful before you do anything. I strongly suggest you talk to a financial adviser, if you do not have an advisor then www.unbiased.co.uk will help you find one.

Q: I am approaching retirement in the next couple of years. Do I have to purchase an annuity at the point when I retire? I am in the fortunate position of being able to do without pension income for a few years and would rather purchase an annuity when the rates are more favourable. Is this possible? downwithcupcakes

A: You do not have to purchase an annuity, and you can either leave your pension without taking anything from it for the time being or alternatively you can go into income drawdown and start taking an income from your fund. Be careful, though, as there is no guarantee annuity rates will improve. It's very important to get this decision right, and as there are also other options you could consider, have a look at websites such as www.pensionsadvisoryservice.org.uk which can provide a wealth of information.

Q: I am still working and currently have three pensions, none of which I'm paying into at the moment. There's a final salary pension from my old employer, one with Standard Life and one with Friends Provident. I'd like to start paying into a pension again even though my employer doesn't contribute. What's the best course of action - do I amalgamate the three and just start paying into one? Or do I leave the three where they are and start a brand new one? Banbury

A: You should ask your employer when they will have a scheme which they will contribute to available, as the rules have recently changed and some point in the next few years, they will need to make this available to most of their employees. And it is likely you will be included in this. In this way you will also benefit from an employer contribution, usually making it very attractive to join the scheme.

In respect of your existing benefits, think very carefully before moving them as particularly the final salary scheme will have valuable guaranteed benefits. Have a read up of pensions on the Money Advice Service - and also seek a financial adviser if you need one.

Q: Have you got any tips for inflation-proofing savings? I am quite concerned about having to live on a fixed income with rising inflation. congereel

A: You've highlighted a real problem for pensioners, because often inflation that pensioners suffer is worse than everybody else. This is because a higher proportion of pensioners' income is spent on food and utility bills, which traditionally has a high rate of inflation.

In terms of inflation-proofing your savings, it may be you will need to consider other types of savings and annuity solutions, which may carry some investment risks. Obviously you will need to be comfortable with this, as though these have the capacity to keep pace with inflation, it does also mean there is some risk that your income may go down or your capital could be reduced.

There are a number of websites which can give you some tips on looking after your finances in retirement, I have already mentioned a few, but Age UK is also very useful and has some information in this regard.

Q: I am paying something called trail commission to a financial advisor I employed about five years ago to help me after I had a small legacy. He has done nothing more in that time. Do I have to keep on paying it? crostini

A: Presumably you mean a trail commission which is paid directly into your investment. The first thing to do, is contact the adviser and establish what he is doing for you to justify this ongoing payment. He should be providing a level of service, which you can then decide if this provides value for money.

Q: What are the relative merits of investing versus keeping money in cash? Don't most investment schemes make money for the providers regardless of whether the investment makes money or loses? I am concerned about how much I would have to pay in commission, management fees and other costs. hopefulgran

A: From 31st December, commission will no longer exist in financial services for pensions and investment advice, and you will need to agree a fee with an adviser. One of the reasons for introducing this change is transparency to the customer and you should be easily able to determine not only the cost of this advice but also the cost of any investment or pension products which you choose to buy. Clearly many people have concerns over what they are paying in charges, but these changes will hopefully help put your mind at rest.

Q: My mother died young having paid into a pension from which no one got any benefit. We didn't have much money when I was growing up and I often wonder if she would have been better off spending more on herself rather than scrimping to pay into a pension that none but the pension company profited from. So 1) What can you do to ensure that the money you pay into a pension is enjoyed by someone should you die before you are old enough to claim it? And 2) how do you balance how much income you pay into a pension vs how much you spend enjoying your youth while you still have it? muddyboots

A: 1) Your pension provider should be able to provide you with a form of nomination/expression of wish, which will enable you to say to your provider who you wish the money to go to if you die before retirement. These should be kept up to date and changed if circumstances change.

And 2) clearly I'm not saying save every penny now at the expense of enjoying yourself, but looking at it from another perspective, many people are reaching retirement in their sixties and very much feel like they want to lead an active life, travel the world and do many things at this time. It is therefore important to make sure the finances are in place to be able to do so.

My neighbours over the road from me have recently retired and have just returned from a three-month holiday visiting their family in Australia. 70 seems to be the new 50!

Q: I see you've mentioned drawdown as an alternative to annuities. Could you possibly explain whether drawdown is available to everyone and what the implications are of taking your pension in this way? flopsybunny

A: Drawdown involves taking an income from your fund rather than having it guaranteed from an insurance company in the traditional way as with an annuity. This gives you more flexibility over income as you can also alter the amount you take (typically within limits), but there is also a risk as if your fund value drops, your income could fall in the future. Whether it is suitable or not, very much depends on your individual circumstances and attitude to risk. Whether you have any other sources of income will also be important in determining if it is suitable.

Q: I had a hopeless Equitable life pension - having opted out of SERPS. I was out of the workplace having children and have come back part-time. I'm almost 50 with no current pension. What can I/should I do? My husband has a pension but he keeps saying it's going to be worth nothing because of current economic climate. Would I be better buying a small flat to rent out and then perhaps sell that when I want to retire (or move into it and sell our house when we retire?) mincepie

A: First of all, we've just released some information on our own website on couples planning for retirement. A few things to think about:

1) Check your state pension entitlement and also if it is worth paying voluntary national insurance contributions. Have a look at the Pensions Advisory website for this. It can be complicated, but you can even speak to them in person if needed. Their telephone number is 0845 601 2923.

2) Make sure you know what benefit your husband's pension gives you, if he were to die first. This depends on what type of scheme this is.

3) Property as an investment has worked out well for many people, but it is also important to think about diversification. You mention you have a house already, so if you buy a flat you are very exposed to the residential property market.

4) Check what the value is of your equitable life pension and if this needs any changes, for example where is this invested and whether this is still appropriate to you.

5) It is also worth considering paying contributions to a pension plan, as this will give you tax relief on your contributions and a tax-free (25%) lump sum when you draw the benefits. Also consider ISAs, as although no tax relief is available, benefits are available tax-free when you draw them.

Have a read of the Money Advice Service website and speak to an adviser if necessary.

Q: What is your opinion of Discounted Gift Plans for IHT purposes? My IFA is recommending it, but it all seems a bit drastic. I am recently widowed and I know my late husband was a bit iffy about it, although the money man tells me that he was coming round to the idea . My 'trustees' think it's a great idea - but they would wouldn't they?! Gally

A: These can work out very well for some people, though it's difficult to say anything further as I don't know your individual circumstances. You should raise your concerns with the adviser who I'm sure will be happy to explain in further detail.

Q: I have a company pension scheme but the industry of the company - newspapers - is in steady decline. If the company goes bust do I and my pension have any protection or do I then have to rely on State benefits? DavidH22

A: If your pension is a final salary scheme, then there is a level of protection via the Pension Protection Fund. Other types of schemes are protected via trust anyway, and your employer should be able to give you details of this protection. The assets of the pension scheme should be held separately from the employer.

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Q: Me again! If I decide my adviser isn't doing
anything for the trail commission, can I just stop
paying it? What about a rebate for the years I've already paid? crostini

A: Normally you can turn off trail commission but it depends on the contract with the individual provider. Sounds like you need to speak to your adviser!

And finally from Vince: 

There were numerous questions around pensions and property, and these are questions which are typically asked. The one overriding factor people should consider is whether they are happy to just rely on this as a method of saving for retirement? People should also remember they may often own their house and if they start additionally investing in buy-to-let property they can be very exposed to just this one type of investment.

Pensions have a very wide investment choice, and whilst it doesn't include residential property, you can invest in commercial property funds if you desire. There are also many other types of investment available that can be held within a pension.

Pensions give you tax relief at your highest marginal rate and also a tax-free lump sum at retirement. Importantly before a pension is drawn, the fund value is usually available as a lump sum to your chosen dependent. There are also different ways of drawing a pension now, such as not only conventional annuities, but also investment-linked annuities and income drawdown.

Several people have questioned what they should do with existing pension funds and whether they should all be merged into one. There is no easy answer to this, but think carefully before transferring existing plans as these may have valuable benefits, for example, some existing plans will have guaranteed annuity rates which will be higher than available in the open market when you come to draw your pension.

The only real way of making sure all these factors are considered is by seeking professional advice specific to your circumstances and your existing arrangements.

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