spring 2015 myfuture - amazon web services…myfuture spring 2015 3humans are often guilty of...

myfutureFIDELITY’S PENSIONS MAGAZINE

SPRING 2015

A new world for your finances

For pensions, saving and investing

TOP FIVE TIPSThe power of compound interest

THE INSIDERA new approach to investing

Also featured...

MYFUTURE SPRING 20152

10 Number PowerMaximise the potential of your savings

12 Pensions DoctorAnswers to your questions

13 Money Multimedia Tools of the trade

14 Investments 101Don’t put all your eggs in one basket

16 Make sure your financial plan does the jobHow Fidelity can help

17 The Insider A new approach to investing

18 Pensions IQ Preparing for and being retired

in numbers

4 A new world for your financesPensions are an integral part of your financial planning

8 Top Five Tips…for pensions, saving and investing

9 Five minutes with... How to make your family’s life easier

Contents

MYFUTURE SPRING 2015 3

Humans are often guilty of exaggeration. We’re told not to be dramatic or to blow things out of proportion.

But sometimes we shouldn’t play things down. Sometimes what we may think are molehills really are mountains.

This is the case for the radical retirement options that come into effect in April this year. They break new ground and open up a world of opportunity for your finances.

This edition focuses on these monumental changes, as well as on saving and investing in general with extremely helpful facts and tips.

A new world for your finances on page 4 explains the options you now have for your retirement savings, and how pensions are blazing a trail for your financial plans. Be inspired by The Insider on page 17 to think about what these changes could mean for you. And see the tremendous power of compound interest in action on page 10 in Number Power.

I hope that all of the superlatives in this message highlight what a good read myfuture is!

If we can help you, please get in touch.

Julian Webb Head of DC & Workplace Savings

Issued by FIL Pensions Management. Authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 2015142. Registered offices at: Oakhill House, 130 Tonbridge Road, Hildenborough, Kent, England TN11 9DZ. Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited. March 2015. CI4043

Everything you need is online:

PlanViewer is the simplest way to take control of your retirement planning and manage your pension account. If you don’t have your login details you can request them on the site: planviewer.co.uk

There is general retirement planning information on our main website: fidelity.co.uk/pensions

If you need to contact us:

Email [email protected]

Call 0800 368 6868 (open Monday to Friday from 8am to 6pm)

To give us feedback or share your thoughts on the magazine:

Email [email protected]

Take control

Welcome to myfuture


A new world for your finances

If you’re asked whether you have savings or investments, hopefully the answer is yes. You may have money in the bank, new ISAs, unit trusts. You may mention your house or a buy-to-let property you own. But hang on. Haven’t you forgotten something?

Chances are you’ll forget to mention your retirement savings – the pension account you and your employer currently save into each month, and perhaps other pension accounts you have.

You’re not alone. Many people ‘forget’ their retirement savings, or at least don’t think of them in quite the same way as other money they’re accumulating. Pensions feel a bit remote for many of us. They’re locked away until retirement, aren’t they? My company takes care of it, don’t they?

Well that’s all about to change from April this year. It’s a whole new world for your financial planning.

Take note!Just because you can access your retirement savings from age 55 doesn’t mean that you should. Obviously, the more of your savings you take at 55, the less you’ll have to live on later. And your savings will have less time to grow. You don’t have to do anything with your savings until you’re ready to.

It’s also important to understand how the different options work and their potential implications, in particular their tax implications.

Pensions – time for a re-thinkWhen we turn 55, we’ll have the freedom to do more or less what we want with our retirement savings from our defined contribution pension schemes.

The new rules from April make defined contribution pensions as flexible as other investments once you reach age 55.

So, you can no longer afford to forget about your retirement savings until you’re ready to stop working for good. Being able to access your savings from 55 makes them an integral part of your financial planning right now.


Pensions – new options kick in from age 55From April 2015, pensions will be all about flexibility and the choice to do what suits you (but, please bear in mind the ‘Take note’ box on page 4). Pensions will also still offer valuable tax benefits that can help you build up your retirement savings over the years.

Your options What to look out for

1. Do nothing and keep your savings invested

• You don’t have to use your retirement savings.

• They can remain invested until you decide to start using them.

2. Withdraw your savings in stages – a little, a lot or all of it to spend, invest or save as you choose

• You can take 25% of your savings as a tax-free cash lump sum.

• The rest is taxed at your marginal rate at the time you withdraw it. It’s worth noting that the cash you take over the tax-free amount would be added to any other income you receive that year (e.g. your salary and bonuses). In some cases, that could push you into a higher tax bracket for the year.

• The tax implications of withdrawing cash can be significant so you must understand them. Depending on how much you take from your savings, and other income you might also be receiving at the time (e.g. your salary), you could end up paying a lot of income tax.

• Think carefully about how much you withdraw, as you could face the risk of running out of money at some point during your retirement.

• You can choose to take the tax-free part of your savings only, and make a decision on the rest at a later date.

3. Keep your savings invested and take a taxable income (called a drawdown pension)

• You decide how much income to take and when to take it.

• The income you take is taxed at your marginal rate. It’s worth noting that the income you take is added to any other income you may be receiving at the time (e.g. your salary) to work out how much tax you owe.

• You need to be comfortable deciding where to invest your savings, how much income to take and how often to take it, as you don’t want to run out of savings.

• For this option, you would need to transfer your savings to a drawdown pension arrangement, such as the Fidelity Self-Invested Personal Pension (SIPP).

• You can also take 25% of your savings as a tax-free cash lump sum.

4. Guarantee your income (buy an annuity)

• You give the insurance company of your choice the portion of your savings you want to use to buy an annuity. The insurance company pays you a guaranteed income for life.

• The income will be taxed at your marginal rate.

• There are many different types of annuities that offer different features depending on your preferences, health and lifestyle. It’s worth noting that the younger you are when you buy an annuity, the lower the income you’ll typically receive.

• Normally you can’t change your mind once you’ve bought an annuity.

• You can also take 25% of your savings as a tax-free cash lump sum.

5. A combination of options 2, 3 and 4 • You can choose any combination of these options that suits you.

Take note!Your scheme isn’t obliged to offer all of these options. To take advantage of them, you may have to transfer your savings to another scheme. If this is the case, Fidelity can help you.


Pensions – the advantages These new options for your retirement savings are great news. On top of this flexibility, it’s worth remembering some of the other reasons why saving for retirement in a pension scheme is a good idea.

1. Your company helps you save Your employer’s contributions add to the savings in your pension account. In some schemes, if you save more your company will too.

2. The government adds to your savings The government tops up your savings with tax relief1. For most of us tax relief means that every pound we save only costs us 80p. The government makes up the balance with tax relief.

3. Your pension account belongs to you If you change job you can leave your account where it is, or transfer it to a new employer’s scheme or a personal pension plan.

Financial planning – other opportunities to save and investNow that we’re all starting to think about pensions as part of our overall financial planning, take a look at some other common investment options to see how they all compare.

1 Tax relief depends on individual circumstances and any changes in the law. The manner in which tax relief is given will depend on the type of pension arrangement you are contributing to. Higher-rate tax payers may be able to claim additional tax relief through their tax return.

2 Eligibility to invest in a NISA depends on personal circumstances and all tax rules may change.

Annual limits on investment

Tax efficient Help to invest

Flexibility/choice

NISAs2 (were called ISAs before July 2014)

Yes

• The allowance for the upcoming tax year (2015/16) is £15,240. You can invest this in a cash or stocks and shares NISA, or any combination of the two.

Yes

• You don’t pay income or capital gains tax on any increase in the value of your NISA under current tax rules. This means you can draw a tax-free income from a NISA. (Note that if you have a stocks and shares NISA, there is a 10% tax credit on dividend income.)

• On death, NISAs are included in the value of the estate so beneficiaries may have to pay inheritance tax.

No Yes

• You can take your money out whenever you need it. There’s no limit on how much you can take at any time.

• You choose where to invest your NISA.

• Note that if you don’t use your NISA allowance in any tax year you lose it.

Pension account

Yes

• You can contribute up to £40,000 (called the annual allowance) a year and receive tax advantages.

• If you haven’t used the full annual allowance for the last three tax years, you may be able to contribute more than this and still receive tax relief (called carry forward).

• If from age 55 you decide to draw an income, the amount you can contribute and still receive tax relief on may be reduced to £10,000.

Yes

• The government tops up your contributions with tax relief.

• Your savings grow free of capital gains tax (although there is a 10% tax credit on dividends that cannot be reclaimed).

• You can normally take up to 25% of your savings as a tax-free cash lump from age 55.

• Pensions can be passed on to the next generation tax free, provided that beneficiaries keep the money in a pension. Any withdrawals would only be taxed at the beneficiaries’ marginal rate if you died after age 75.

Yes

• Your company contributes to your pension account.

• The government helps you save with tax relief.

Yes

• You can contribute more than the minimum required by your scheme.

• You can choose where to invest your savings in the funds offered by your scheme.

• From age 55 you can choose what to do with your savings. It’s important to understand the implications of the options you have, particularly the tax implications. See the section ‘Pensions – new options kick in from age 55’ on page 5 for details.


DictionaryThe annual allowance is the maximum you or someone else, such as your employer, can contribute to all of your pension accounts in one year, without incurring a tax charge. In 2015/16 the annual allowance is £40,000.

In a defined contribution pension scheme, the income you might get at retirement depends on how much you and your employer pay in, and the investment performance of the funds your savings are invested in.

Marginal tax rate means you pay different rates of tax on different portions of your earnings. Your earnings include your salary and any other income you receive. For the 2015/16 tax year the rates are: 20% on income between £10,600 and £31,785, 40% on income between £31,786 and £150,000, and 45% on income over £150,000.

New ISAs (NISAs) are a tax-efficient way to save as you don’t pay income or capital gains tax on the growth in value of a NISA investment. Read Pensions Doctor on page 12 for details on how NISAs work.

Unit trusts and open-ended investment companies (OEICs) are other types of investment that provide a tax-efficient income. Your money is put into a fund and pooled along with money from other investors. This pooled fund is then invested by a fund manager.

Your financial journey – ready for a re-boot?With tax advantages, help to save and now the freedom to choose what to do with your retirement savings from age 55, it’s a whole new world for pensions – and for your financial planning.

Find out moreTake a look at our online guide to retirement, ‘Making sense of retirement’, to find out more about pensions, retiring and other savings options. You’ll find a link to the guide on the PlanViewer homepage at planviewer.co.uk. You can request your PlanViewer login details on the site if you no longer have them.

Annual limits on investment

Tax efficient Help to invest

Flexibility/choice

Property No No

• Any income you earn from renting a property is taxable. When you come to sell, you’ll pay capital gains tax on any profit.

• The value of property may be subject to inheritance tax on death.

Yes

• Bank and building society mortgages and help-to-buy schemes.

Yes and No

• You choose what to buy and when.

• You choose when to sell – but property may not always be easy to sell quickly and at the price you’d like.

Savings account

No No

• The interest you earn is taxed.

No Yes

• There are many options to choose from. You can also lock in savings for different periods of time to earn a higher interest rate.

Unit trusts and open-ended investment companies (OEICs)

No Yes and No

• You have an annual capital gains allowance (£11,100 for the 2015/16 tax year) – you will need to pay capital gains tax on your overall gains above your tax-free allowance.

• If your fund is invested in shares, any dividend income usually carries a 10% tax credit.

No Yes

• There are many different options offered by many different companies.

• You can sell unit trusts whenever you choose.


TOP FIVE TIPS

…for pensions, saving and investing

Aim to save as much as you can afford and review the amount you save regularly. Don’t lose out on opportunities to save if possible. For example, in some pension schemes if you contribute more, your employer will too. And you lose your yearly new ISA allowance if you don’t use it. Read Pensions Doctor on page 12 to find out more about NISAs.

Take charge

1

3

4

2Make the most of tax-free savings and investments. You’re entitled to tax relief on your pension contributions, so saving for retirement costs less than you think. With NISAs you currently pay no income tax on the interest or dividends you receive, and any profits from investments are free of capital gains tax. Read A new world for your finances on page 4 for the tax advantages of different savings and investment options.

Use tax advantages

When you save or invest you earn interest or returns on that money. Over time, you earn interest both on the original amount you invested as well as on the interest. In other words, the interest you earn is calculated on a larger amount than your initial investment. That’s the power of compound interest. Read Number Power on page 10 to see how it works in practice.

Harness the power of compound interest

The internet is full of simple, often quick, tools and apps that can help you manage your spending, work out how much you can afford to save, and decide on the type of investments you’d prefer. Read Money Multimedia on page 13 for details of some of Fidelity’s retirement planning tools.

Tinker with online tools Read about it. Ask friends and family for their investment ideas. Find out more online. There are many websites that are loaded with information and guidance. Examples include:

• moneyadviceservice.org.uk/en• lovemoney.com• moneysavingexpert.com• thisismoney.co.uk• gov.uk/pensionwise (if you’re

55 and older and considering your options).

Get in touch with Fidelity if you have any questions. There is so much information out there – you just need to use it.

Just do it5


FIVE MINUTES WITH…Ian RamptonWould you like to make your family’s life easier? Ian Rampton, Head of Customer Service at Fidelity, spoke to us about a simple thing you can do.

“I sit on Fidelity’s committee that decides how to distribute people’s retirement savings when they die1.

Recently we had a case where a man passed away suddenly leaving an ex-wife and children. He didn’t have a will and hadn’t completed an expression of wish form (EOW) for his pension scheme. To decide what to do with his retirement savings we had to look into his life. Our investigation uncovered his girlfriend who it turned out he’d intended to marry. His family didn’t acknowledge her and had not admitted her existence to us.

Clearly, given that they were planning to get married, we needed to consider her as a potential beneficiary. In the end we decided that she was entitled to a share of his savings. But the process would have been much simpler, potentially less acrimonious, and definitely quicker for all of the deceased’s loved ones if he’d filled in an EOW.

In a case like this we just have to hope we got it right.

We see a lot of cases like this: people who have never filled in an EOW or haven’t kept it up-to-date. Their circumstances then change – they get divorced, they have kids, they have a child with another partner – and then they pass away.

I remember a case last year in which a woman died and was in the process of getting divorced. She had filled in an EOW some years before naming her husband as the beneficiary. An up-to-date EOW would’ve helped us figure out who she now wanted to pass her retirement savings on to, given that she’d split up with her husband.

The EOW ensures that we have all the information we need to do our best to carry out someone’s wishes if they pass away. Obviously, the decision we make will be as fair and equitable as possible based on the information we can gather. But we can never know exactly what a deceased would’ve wanted.

So to save your loved ones time and stress please do a simple thing. The EOW is on PlanViewer or call Fidelity2 for a copy. Please fill it in and follow the instructions on the form to ensure your scheme is aware of your wishes. And whenever your life takes a new turn, update the form. That way you don’t need to worry – you’ll know at any time that the EOW reflects your wishes.”

1. In some schemes trustees perform this function. 2. You’ll find contact details on page 3.

Speed Read

• An expression of wish form (EOW) makes clear who you’d like your retirement savings to go to if you died.

• A committee has discretion as to whom to pass retirement savings on to. They take many factors into account including a deceased’s wishes based on their EOW.

• If a deceased hasn’t filled in an EOW, the committee reviews their circumstances, and makes a decision based on what they think the deceased would have wanted.

• Make sure your scheme is aware of your wishes by filling in an EOW.


Maximise the potential of your savings

Money that you save in a savings account grows with interest.

Money that you invest in say an investment fund will, over time, hopefully also grow as investment returns are added to it. Interest and returns – we’ll just call it interest from now on – are a wonderful part of saving. It’s the reason why

putting your money under the mattress is not always such a good idea!

But interest is only one positive feature of saving. Compound interest is another because it maximises the earnings potential of your savings.


An extra £74 may not seem very much but look at it this way: you didn’t have to do anything to earn it. And more importantly, this £74 can now also earn interest.

This increase in the interest that your savings earn each year is compounding in action. It will continue as long as you keep the money invested.

Over a long time it starts to add up

The longer you leave your savings invested, the more they should grow. Don’t forget that in reality savers often add to their savings over time, so there would be even more money for compound interest to work its magic on. It’s no wonder that Albert Einstein called compound interest the

“greatest mathematical discovery of all time”.

Compound interest is powerfulCompound interest is interest that you earn on the amount you invest and also on the

interest you’ve already earned. In other words, it’s interest paid on interest. It means that over time the speed at which your savings grow steadily increases.

1 Year

2 Years

3 Years

You’ll have £10,600



Your savings will earn £600

in interest.

Your savings will earn interest of £636, £36 more than the previous

year.

Your savings will earn £674 in year 3, £74 more than in the first

year.

10 Years

30 Years



Your savings will earn interest of £1,013 in year 10, £413 more than in the first

year.

Your savings will earn £3,251

in year 30, £2,651 more than in the

first year.

Take a look at how it worksSay you save £10,000 and earn interest of 6%:


Email the Doctor your question at

[email protected]

1. If I speak to a financial adviser, what questions should I ask to make sure I know exactly what they’re offering me?

When agreeing to work with a financial adviser, it’s in your best interests to know exactly what you’re getting into. Financial advisers must be clear and open about their services and the charges. Make sure to ask:

• Can I see a list of your services? This should be a detailed list setting out how often you’ll meet face-to-face, how often they’ll update you, and when they’ll send you statements of your investments. They must also tell you if they offer independent advice and can advise you on the entire range of options available, or if they’re limited to advising you on a specific range of products.

• How much will I pay and how will I pay for it? Fees are transparent, and you should agree them upfront. You may pay the agreed amount by cheque, regular instalments, or directly from your investments.

• What are your qualifications? Advisers are required, by the Financial Conduct Authority, to have a minimum level of qualification.

If you’re thinking about consulting with a financial adviser, financialplanning.org.uk/wayfinder can help you find one. You can also ask friends, family or colleagues if they can recommend an adviser to you.

2. What is a NISA?

ISAs (individual savings accounts) became NISAs (the new ISA) in July 2014.

NISAs have the same tax advantages as ISAs – investors don’t pay income or capital gains tax on any growth in the value of their NISA investments.

But, NISAs are simpler than ISAs. Cash NISAs and stocks and shares NISAs have the same investment limit (previously the limits were different). The investment limit is the maximum amount that you can invest in a NISA in each tax year. Limits tend to change each year. For the 2015/16 tax year (which ends on 5 April 2016), the limit is £15,240.

You can open one cash NISA and one stocks and shares NISA in each tax year, and split your investment between them up to the limit. For example, you could invest:

• £15,240 in a cash NISA and nothing in a stocks and shares NISA

OR

• £15,240 in a stocks and shares NISA and nothing in a cash NISA

OR

• Any combination of amounts in a cash NISA and a stocks and shares NISA up to the limit – for example, £5,000 in a cash NISA and £10,240 in a stocks and shares NISA.

Read A new world for your finances on page 4 to find out more about NISAs.


Thinking about changing how much you’re saving for retirement? Want an idea of how much your retirement savings could be worth when you’re ready to start withdrawing them? Fidelity’s planning tools can help. They’re easy to use and most only take about five minutes to work through.

Tools of the trade

MONEY MULTIMEDIA

Figure out how much you

may need

Compare the options you have

for your savings

RETIREMENT CALCULATOR

Choose the things you’d like to do when you’re retired (e.g. holidays, home improvements, gym membership), and the calculator quickly works out how much it will cost you.

RETIREMENT BUDGETING TOOL

Gives you a detailed estimate of what your expenses might be when you’re retired, and how much you may need to pay for the lifestyle you’d like.

RETIREMENT INCOME ESTIMATOR

If you’re between 55 and 75, this tool sets out an estimate of the income your retirement savings may give you for the two most common ways of taking an income (e.g. buying an annuity and a drawdown pension).

RETIREMENT OPTIONS TOOL

Helps you to consider the options you have for your retirement savings, and which might work best for you.

See whether you’re currently

on track

MYPLAN

Sets out a simple indication of the total amount you’re projected to have saved by retirement, and the pre-tax monthly income this might give you if you buy an annuity. You can change different variables to see the effect on your savings. For example, could you contribute a little more each month, or contribute for a year or two longer?

Using the toolsThe tools are on PlanViewer in the ‘My toolkit’ section.


Don’t put all your eggs in one basketSpreading your investments across different investment options helps you manage investment risk. This is called diversification. It’s a crucial part of successful investing.

Why investors ‘spread their eggs’

Imagine if you invested all of your savings in one investment fund and it performed badly. You could face a big loss. But, imagine that you had spread – or diversified – your savings across a number of different funds instead. If one of them did badly but the others did well, you could reduce your losses. Basically, you’d be in a better position to deal with the poor performance of one fund if you’d invested in several funds.

A few diversification basics

If you invest in property, choose

properties in different locations offering facilities that meet different needs,

and different types of properties (e.g. offices or retail

properties).

If you invest in bonds, choose bonds issued by different countries

and companies.

If you invest in shares, choose shares in

different industries, companies and countries so your investments don’t

depend on the fortunes of one industry (e.g. financial services), or one company (e.g. Vodafone), or one

stock market (e.g. the UK).

Invest in more than one asset class

(typical asset classes are shares, bonds,

property and cash).


The good newsWhen you invest for retirement, a lot of the hard work of diversifying investments is done for you.

Investment companies, like Fidelity, offer investment funds that pool your savings with those of many other investors to buy a selection of asset classes. By joining forces with other investors, you have access to more companies or stock markets than if you were investing on your own. So, you can increase your investment opportunities while spreading the risk.

You also have a wide choice of investment funds to invest in. Your scheme’s investment options will typically include all the main asset classes and major financial markets, such as the UK, Europe, the US and Asia.

How to diversify your retirement savingsYou have a choice of different types of investment funds so there are typically many ways to diversify your investments (please note that not all schemes offer all types of investment funds). For example:

You could invest your savings in different equity funds, say a European equity fund and a global equity fund that invests all over the world, as different stock markets won’t necessarily be affected by exactly the same trends.

You could invest in funds managed by different investment managers, for example, Fidelity, Legal & General, Standard Life or HSBC so you’re not dependant on one company.

You could spread your savings across one or more equity funds to make sure they have the opportunity to grow, and invest a portion of your savings in a property fund. They also offer the potential for long-term growth, but don’t necessarily follow the same trends as the stock market.

If you’re closer to retirement, or uncomfortable taking on a lot of investment risk, you could invest in an equity fund but complement that investment with bond and cash funds. This means you won’t be exposing all of your savings to the risk of a sudden fall in the stock market (though you may also be reducing their growth potential over the long term).

To see how and where your savings are invested, log into your pension account on PlanViewer at planviewer.co.uk. You can also take a look at all the investment fund options offered by your scheme.

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Asset classes

Types of investments – shares or equities, bonds, property and cash are the main ones.

Investment fund

A pool of money that is managed according to specific guidelines. Your retirement savings are invested in different funds. The investment manager uses your contributions to buy different asset classes.

Investment risk

The possibility of losing some, or all, of the money you’ve invested.


The new options you have for your retirement savings offer exciting opportunities. But new choices bring more responsibility. It’s never been as important to think about your financial planning goals and develop a plan that’s right for you.

Make sure your financial

We can help

Fidelity is one of the largest new

ISA providers in the UK. We offer

a wide range of funds managed

by Fidelity and many other

investment managers, and can

help you consider your options.

Visit fidelity.co.uk to find out more.

Interested in new ISAs?

We can help

Our Retirement Service offers information, guidance

and advice if you need it. Trained specialists can

explain your options and their implications in detail.

They can also give you personalised advice and

recommendations for which there is a fee.

Call 0800 368 6873.

Find out more about this service on PlanViewer

at planviewer.co.uk – click on the ‘Making sense

of retirement’ link on the homepage.

Thinking about withdrawing money

from your retirement savings?

(You must be 55 or over from April 2015)

Wondering about pensions?We can helpPlanViewer and online toolsFor a snapshot of your current retirement savings,

to find out more about your investment options

and to use our tools to help you make decisions,

log into your pension account on PlanViewer

at planviewer.co.uk (you can request your login

details on the site if you need to). Guidance and informationFor answers to your questions or to talk through

different options, call us on 0800 368 6868 or

email [email protected]


THEA new approach to investing

The new pension rules, which come into effect in April this year, provide the freedom for anyone over the age of 55 to remain in the same investments they have built up in their pension account over their working life, and to draw on those investments to provide an income.

Investing for income versus growth

The major advantages of this new freedom include retaining control over your retirement savings, and the ability to pass on the money remaining in your pension account after death. However, investing to provide an income from a pension account poses different considerations from saving to build up the account.

This means that anyone who intends to take advantage of the new rules will find it worthwhile to review their investment strategy. There are two main reasons for this:

1. There is less need to move the account into very low-risk investments in preparation for buying an annuity.

2. The right investment strategy for building up savings might be the wrong strategy when it comes to drawing on them.

Today: protecting your savings versus maximising growth

Before the new pension rules, if you bought an annuity, a sound investment strategy would have been to mostly use equity funds in your pension account for as long as possible. In the final years before retirement, you would change into very low-risk funds (including cash). This is designed firstly to help build your pension account. It then aims to protect the account against the possibility of a market crash wrecking the value of your savings just at the time when you need to take them out for the annuity purchase. Of course, if the market goes up in those final years any benefit will be severely limited, but in the interests of security it is a prudent approach.

Under the new rules, anyone intending to keep their money in their pension account but to take an income from it (known as drawdown pension), has no need to follow this strategy. By keeping their account at least partly invested in equity funds, they can continue benefiting in the event of a rising stock market.

After age 55: protecting your savings versus maximising growth

While building up your pension account, the stock market’s ups and downs are easier to ride out, as your existing savings have time to recover and you are still making regular contributions to them.

Once you begin drawing on your retirement savings, if they fall in value recovery is more difficult. This potentially jeopardises the amount of income you can take, and poses a real risk of your savings running out. Remember that if your savings fall by 25%, they need to rise by 33% to regain their previous value. If you had already taken out 5% before the stock market fall, they would need to rise by more than 40%. If you are intending to take an income from your account after age 55, it is sensible to add some lower-risk investments, alongside equity funds, with the aim of limiting the effect of stock market falls.

It is also important not to take out more income than your account can bear. So if you are able to take a bit less if the market falls, this can help your account to recover more quickly.

Think about what you’ll do

If you intend to take an income, it is worthwhile reviewing now which funds your account is invested in. This will help to ensure they have the potential to continue growing until the time you plan to start taking an income. Then when the time comes, you will probably want to trade some of that growth potential for a reduced overall risk to enjoy the benefits of a sustainable income.

Peter Hicks is a retirement specialist with over 25 years’ investment and financial services experience.


Minimum tax relief on pension contributions. For most of us, for every £80 that we pay in £100 will actually be added to our pension accounts.

Note: Tax relief depends on individual circumstances and any changes in the law. The manner in which tax relief is given will depend on the type of pension arrangement you are contributing to. Higher-rate tax payers may be able to claim additional tax relief through their tax return.

The annual allowance or the total annual contribution you or someone else, such as your employer, can make to your pension account and get tax relief. You may be able to contribute more if you haven’t used the full annual allowance for the last three tax years.

The money-purchase annual allowance. This is a restricted annual allowance that may apply to people who withdraw their retirement savings from age 55, and continue to pay into their pension account.

£10,000

Saving for retirement 20%

£40,000

Pensions IQPreparing for and being retired in numbers

Retirement is a numbers game. These are some of the figures you need to know, and a few statistics you may find interesting.


The basic State Pension before tax for a single person.

2015/16 tax year

The earliest age you can claim a pension from the government or State Pension age. Find out yours at gov.uk/calculate-state-pension

Total government spending on providing the basic State Pension.

Source: Pensions Policy Institute (2012/13)

The State Pension £6,029.40

a year

62-68

£63billion

Retirement The earliest age you can normally start to withdraw savings from your pension account.

The amount of tax-free cash you can normally withdraw from your pension account from age 55.

The average retirement age for women.

The average retirement age for men.

Source: Department for Work and Pensions (2014)

The average pension account value of people over age 60.

Source: Fidelity, DC Future Matters Report (2014)

The average length of time retirement is expected to last.

Source: HSBC The future of Retirement: A new reality (2013)

25%

63.1

55

64.7

£45,000

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