Having previously addressed a young professional's lifestyle change and a divorcee's retirement plans, this month's independent financial adviser responds to a couple who are wondering what steps they can take to compensate for an employer suspending pension contributions. To submit your own question or scenario for consideration as a future case study, please e-mail editorial@hemscott.co.uk.
Case Study
"Recently my company suspended our pension programme due to the economy.
I hope they will reinstate it soon but I am not holding my breath. At
the same time, my husband started his own business so he has no pension
match either. We want to continue to save for retirement but now I am
worried we are not saving enough. If we assume we won’t get any help
from employers in the future what percentage of our income should we be
putting in a retirement savings each month?
"We are both 35 years of age and our combined annual income is approximately £150,000. Currently, we have about £40,000 saved for retirement. We own two properties that total approximately £350,000 and we have mortgages on both these.
"Our retirement goal? Simple, save as much as we can to retire as early as possible. How much should we put into a retirement fund each year?"
Independent Response
Andrew Reeves, Certified and Chartered Financial Planner, Director of The
Investment Coach Ltd.
"Firstly, I am sorry your company has stopped its matched pension contributions. The economic situation has indeed been dire but without knowing which sector you work in I cannot comment further. You will be interested to know that legislation is due to change meaning that your employer may have to contribute (currently the minimum requirement is simply to allow access to a stakeholder pension scheme).
"In brief: a minimum employer contribution of 3% on a band of earnings will be required. However, contributions can be more than this. The total minimum contribution for eligible workers should equal 8% of that band of earnings. This is made up of employer contributions, worker contributions and tax relief. Contributions from both employers and employees will be phased in over a transitional period. You can learn more at the Personal Accounts Delivery Authority. So, there is a starting point to your consideration of how much to put into a retirement fund each year.
"You should note that retirement planning does not need to simply encompass pensions but can include ISAs and property. The latter will particularly interest you as you have two properties. I imagine your second home has potential for rental income and depending on the mortgage amount there may be some equity in the property for an eventual sale. There may be clever things you can do here with relation to Capital Gains Tax and use of your Principal Private Residence relief.
"You don't give the split in income between you and your husband but you should note that there are tax implications coming next tax year for those earning over £100,000 giving a 60% effective rate of tax for income between £100,000 and £112,950! However, pension contributions can help here. You can learn more on Deloitte's Web site. If either of your earnings reaches £150,000 then there are further rules that will affect pension planning.
"One idea that gives real benefits is contributing to your pension via
"salary sacrifice." This is where you give up some salary (i.e. gross
pay) and your employer pays the contribution directly to your pension.
For higher rate taxpayers there is the advantage that the 40% tax relief
is effectively received immediately: if the pension contribution comes
from net/take home pay, you get 20% relief at source and then you have
to claim the other 20% via your tax return or an adjustment to your PAYE
code. However, the big win is if your employer will pay to your pension
the employer National Insurance saving which is currently 12.8%. It is
cost neutral to the employer. As your husband is his own boss he can
certainly agree to it. There are some disadvantages to salary sacrifice.
The most pertinent one to you, it seems, is that you will have less
income for calculating income multipliers for mortgages.
"There are some excellent pension calculators out there, try this one for starters. These will give you "ball-park" answers to your "how much" question. However, if you want a way to tie everything together including your properties into a true financial/retirement plan I cannot recommend highly enough using a piece of software that does a lifetime cash-flow forecast. You can then see if you really can retire early! The version we use can be sent to clients so they can model their plans on their own PC and we can work collaboratively. I would be delighted to chat to you about this."
Disclaimer: All views expressed in this article are those of the financial adviser and not necessarily those of Morningstar, Inc. Morningstar is not responsible for the financial adviser's comments nor will it be liable in any way for any advice or information provided by the financial adviser.
