e-mail Paul Lewis
on paul@paullewis.co.ukThis piece first appeared in Reader's Digest in January 2002
The text here may not be identical to the published text
Most of us go through life with very little idea of what retirement has in store for us. Don’t be one of them! Test your pensions prowess with our quiz.
QUESTIONS
1. How much a year will your state retirement pension be? (a) £3770 (b) £4791 (c) £5820
2. If your company offers a pension scheme you should join it. True or False?
3. Recent falls in the stock market mean that shares are no longer a safe place for my pension fund. True or False?
4. Paying off credit cards is less important than paying into a pension scheme. True or False?
5. There’s no point in paying into a pension scheme if you plan to move jobs every few years. True or False?
6. Nowadays you can retire at 50. True or False?
7. It’s better to put what you can afford into a pension plan when you can rather than tying yourself down with regular payments. True or False?
8. Pensions are a waste of time. The money is better in an ISA – it’s still tax-free. True or False?
9. Once I’ve picked a pension plan I needn’t worry about it until I retire. True or False?
10. I am 50 and I don’t have a pension plan so I’ll just have to get used to beans on toast. True or False?
ANSWERS
1. Any of them! (a) the basic state retirement pension is £72.50 a week paid to those with a full National Insurance contribution record. (b) the minimum income guarantee – the Government will bring a single pensioner’s weekly income up to £92.15 as long as their savings are less than £6000. (c) is the average pension and benefit income of recently retired single people. Even that is a small fraction of average pay – around £21,350 a year.
2. True – ish. This used to be always true. And it still is if your employer pays into the pension scheme too – if you don’t join that sort of scheme it’s like turning down a pay rise. But a lot of employers who are offering a stakeholder pension pay nothing in and the deal they offer may not be the best.
3. False – probably. No-one knows, but shares have been the best place for investments in every ten year period since 1940 and, barring unforeseeable disasters, most advisers still think they are – in the long-term. As you approach retirement, your money should gradually be moved into something less risky such as bonds or cash.
4. True. Controlling debt is important and, if you can afford it, pay off your cards. But not at the expense of your pension which is a long-term investment and the sooner you start paying in the more compound interest will turn your savings into a valuable nest-egg.
5. False. As long as you have paid into a company pension scheme for at least two years you can either leave your pension there, or transfer it to a new employer’s scheme or a personal pension. If you pay into a personal pension or a stakeholder pension you can carry on paying in whatever job you do – or even if you don’t do a job.
6. True. Personal pension benefits can be taken at any age between 50 and 75. But you have to have saved up a lot of money to retire comfortably at 50 – on average you will have around 35 years of life left to pay for. The state pension is paid at 65 to men and 60 to women – but for women born after 5 April 1950 pension age will be raised and for those born after 5 April 1955 it will be the same as men – 65.
7. False. It is better to have a discipline about saving and put a regular amount in – even £50 a month (the minimum is usually £20), then you cannot be tempted to spend it. And it is better to get the money in and earning interest as soon as possible.
8. False. Pensions are tax-free when you pay in – for every £78 you put in the Chancellor puts in £22 (£52 if you are a higher rate tax-payer). The money you pay into an ISA is already taxed. ISAs are tax-free when you spend the money. But you’re likely to be paying lower rates of tax when you are retired so the tax-relief is worth less.
9. False. Pensions are like any other investment. Do not put all your eggs in one basket – as customers of Equitable Life have found out recently. A variety of pension plans helps spread your risk. And a scheme that looks good this year may not be so good in 2008, so check each year how your scheme is doing. Most schemes should allow changes without making a charge.
10. False. Nowadays 50 is young – you can pay into a pension until you’re 75. Even if you plan to retire at 60 you can get 10 years’ growth – and the rules allow you to pay in up to 25% of your earnings at 50 – more if you are older. And when you do retire you can draw a quarter of your fund tax-free. Starting at 20 is better – but it is never too late.
January 2002
e-mail Paul Lewis
on paul@paullewis.co.uk