How to make your pension beat the crunch

Posted on: 19 February 2009 by Gareth Hargreaves

In these uncertain times it’s important to understand the full situation surrounding your pension and retirement plans.

Your pension may have lost value, and if so, what can you do to help steady your retirement plans?

Here, we ask everything you need to know to keep you one step ahead in the battle for a successful retirement.

I am relying on my property for my pension instead. Isn't that a good idea, long term?

Property has proved to be a fantastic investment for so many, but the market is in a different cycle now.

Britain has seen a dramatic fall in house prices. Research from brokerage Brewin Dolphin shows 7 million adults will rely on their property to fund their retirement.

Relying only on your property is putting all your eggs in one basket.

The view that house prices outperform equities over the long term does not stand up. While the average real rate of return on property was 270% over the past 20 years, the rate for equities was far higher at 470% (to late 2008).

Diversify your investments beyond just the property market. A market low in stock market cycles can be a good time to invest in pensions, when you can buy more shares for less.

So what different kinds of pension are there? What should I go for and how do I go about it?

If you are offered a pension by your employer, it is always the best option as they will offer a contribution, so they are effectively giving you money.

There are two types of scheme. First, the final salary scheme, which is becoming increasingly rare because it is so expensive for employers.

Based on your years of work, it leaves the onus on your employer to pay you up to two-thirds of your final salary for the rest of your life, for a full working lifetime.

Then there is the defined contribution scheme, where your pension - which both you and your employer contribute to - is invested in the stock market. The sum you are left with upon retirement depends on stock market performance and the amount invested in the pension.

If you are self-employed or not eligible for a company pension, you have several options. You should seek advice from an independent financial advisor (IFA).

You could opt for a SIPP (self invested personal pension), you can manage the investments yourself but get professional help if you prefer. An alternative is a stakeholder pension, introduced in 2001 as an easy-to-understand pension with lower charges. This will be run by a company and your money is invested in a managed fund.

There is also the personal pension, which offers more investment choice than a stakeholder plan, but not as much as a SIPP.

Should I take a couple of years off paying into my pension while times are uncertain?

Around 1.5 million people are contemplating the same thing, according to insurer Axa. But don't do it if you can possibly help it. Any kind of break can have a big impact on your cumulative total.

A 28-year-old putting £300 a month into a stakeholder plan would end up with almost £60,000 less in their pension fund on retirement at 65 by taking just a two-year payment holiday.

I'm 35. Is it too late to start a pension?

No - but you will have to pay more if you want a decent payout in 30 years.

According to research from Hargreaves Lansdown, assuming growth of 7% a year, savers must put away 15% of earnings every year for 40 years to be able to retire with just 50% of final salary.

What is an annuity?

Pension savings are used at retirement to buy an annuity, which pays you a guaranteed income for the rest of your life. They come in a number of guises.

You have to buy one by the age of 75. But you don't have to buy it from whoever you have been using for your pension plan; always shop around to find the best deal for you.
The more you put in, the higher the annual payout you receive.

I am coming close to retirement age. Should I be worried about my pension fund having dropped?

If you are not retiring for another ten years, experts tend to say that as a long-term investor, you can ride out any market volatility and hopefully enjoy the higher long-term returns that equities generally provide.

If you have five years before you retire, speak to an IFA, as it all depends on what your pension has been invested in.

Hopefully before the value of shares dropped, you will have decreased your stock market-based investments and increased cash and fixed-interest investments.

Now would be a bad time to start such a strategy because if you have been heavily invested in equities, the value of your pension will most definitely have fallen, and by switching out you will crystallise those losses.

If you have just a year to go, and you have not been decreasing your exposure to risk, take action now.

First, get an up-to-date fund value from your pension provider. If your pension fund has been hit by the recent market fall, your mission is to look for ways to minimise turning paper losses into real ones.

How can I do that?

You can delay your retirement and buy your savings some time in a bid to help them recover.

Or consider keeping the lion's share of your pension pot fully invested by going for an income drawdown plan and taking only your tax-free cash sum now (up to 25% of your total fund value when you retire) to provide you with an income for a few years.

Look at liquid assets that you could use, such as Isa savings, to generate short-term income. Hopefully the stock markets will improve, although the risk is that annuity rates could drop. But phasing helps to balance off this problem.

Is your pension beating the credit crunch? Do you have any pension planning advice to pass on?

If so, let us know by leaving a comment in the box below.

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