8 Foolish Tips For A Perfect Pension
If you've resolved to start a pension in 2009, here's everything you need to know to help you plan for your retirement.
Did 2008 pass you by and still no pension? If it looks like money could be tight this year, you might have put your pension on the back burner again. But getting started can be easier -- and cheaper -- than you think. So make it your resolution to start saving for your retirement now.
If you find pensions a bit of a minefield (and who doesn't!), read my Foolish friend, Serena Cowdy's series Pensions For Beginners: The Complete Guide.
Remember pensions don't have to be hard work if you follow these Foolish tips. So, first things first...
1. Which pension?
That's the big question with so many plans on the market. But which one should you choose? I would say don't waste your time on high-charging, old school schemes. By this I mean personal pensions sold by life insurance companies which have been around for donkey's years. These schemes have got some pretty bad press for being expensive and performing badly.
I'm much keener on the new style SIPP -- otherwise known as a self-invested personal pension. SIPPs give you far more freedom when it comes to choosing where to invest your pension money and are more flexible when you want to retire.
If you feel adventurous you can even put individual shares in your SIPP. (But don't worry if that sounds too scary. You can take the easy route by investing in a tracker fund instead. More to come on that in a moment.)
SIPPs used to charge high, flat fees which were only cost effective for people who had pretty big pensions already. Luckily, all that has changed. A new low cost version has made SIPPs affordable for many more of us and some can be run easily online too.
I like the Vantage SIPP run by Hargreaves Lansdown because it's flexible and low cost. But there are plenty of other plans on offer too.
2. Start now even if your contribution is small
Something is always better than nothing. Even if you can only afford a small contribution to begin with, it can still grow into a decent pension pot by the time you retire.
Look at it this way: Say you're 25 and you pay £50 a month into your pension until you reach 65. At 65, your pension pot would be worth £48,000*.
Now imagine you wait until you're 45 to start your pension but, to make up for lost time, you decide to pay in £100 a month until you're 65. Which route would leave you better off?
Sadly, if you put off your pension until 45, your pot will only be worth around £33,000* - even though you doubled your contribution over twenty years to make up for the fact you started late.
This is my top tip: Pensions need lots of time to grow. The earlier you start the better.
3. Top-up whenever you can
Did you know new rules allow you to invest up to 100% of your earnings into a pension (up to a maximum of £235,000 this tax year)? Don't panic, I'm not suggesting you plough your entire salary into your pension plan! But it does mean you can top your pension up with extra money -- such as bonuses or pay rises -- whenever you like. Remember a well-fed pension is a happy pension!
4. Increase your contributions every year to keep pace with inflation
This is really important because £100 invested today won't be worth nearly as much in 20 or 30 years' time. If you can afford it, I would suggest increasing your contributions over time to keep ahead of inflation (rising prices). Right now inflation is rising at a rate of 3% (as measured by the Retail Prices Index) so try to step up contributions by at least this amount each year.
5. Take up your employer's offer (if there is one)
Is your employer good enough to pay some money into your pension? If there's an offer like this on the table, it'll almost certainly be worth taking it up. Typically, an employer might agree to double the contribution you want to make. That means you've got twice the money pouring into your pension without having to pay anything more out of your own pocket. It's effectively free money. Can't be bad!
6. Think about trackers
If the idea of picking your own investments for your pension scares the heck out of you -- or you simply can't be bothered -- (and let's face it, there are far more fun things to do!) why not put your pension money in an index-tracking fund?
This type of fund aims to replicate -- or track -- the performance of a particular share index. For example, a FTSE 100 tracker fund will invest in all the companies quoted on the index and should produce the same return. So roughly speaking, if the FTSE 100 grows by 5% your fund should grow by 5% too.
By investing in a tracker you don't need to pick any stocks yourself, and the fees are likely to be lower than on any other fund. For more help on choosing the right fund read The Simplest Investing Strategy.
7. Keep your eye on the ball
So you've got your pension up and running at last. That's great. Now all you need to do is keep an eye on how well it's doing. Don't be panicked by short-term dips in value. That's all part of being invested in the stock market. But if it seems to be doing noticeably worse than other similar schemes, then you may need to rethink how your pension is invested.
8. And finally if you still don't have a clue
If all this is as clear as mud (I hope it won't be), don't forget you can speak to a good independent financial adviser for more help.
But don't delay - make 2009 the year you finally start a pension!
*Assumptions: Pension grows at 7% a year and charges of 1% a year are deducted. Values have been adjusted to take account of inflation at a rate of 2.5% a year. Contributions increase by 2.5% a year.