An imposed workplace scheme is not the only option for retirement, as more low-cost Sipps come on to the market.
The financial pages have been full of advice on pensions with the launch of auto-enrollment last week. It has thrown a desperately needed spotlight on how and why we should be saving for later life.
But not everyone is happy that the state is stepping in. If you want to take control for your own retirement saving, a self-invested personal pension or Sipp, could prove a compelling alternative.
Sipps are essentially do-it-yourself pensions, offer more flexibility and a wider range of investment choices than most personal pensions. As well as cash, government bonds and funds, you can choose to invest your money in more complicated investments such as individual shares, open-ended investment companies (Oeics), commercial property and commodities.
They still benefit from all the features of a more traditional pension, including up to 50 per cent tax relief on pension contributions, but instead of trusting the provider to pick funds, you decide how to invest your contributions typically with a much wider range of funds to choose from and the opportunity to invest in direct equities by buying and selling shares.
It's true that when they first emerged, Sipps were targeted at experienced investors with substantial pension pots, but as costs have come down they have proven to be an increasingly popular choice among the general population.
"The Sipp market has been revolutionised in recent years with the emergence of low-cost plans, which have made them accessible to the mass market. Sipps are now becoming ISA-like in their appeal," says Jason Hollands of independent financial adviser (IFA) Bestinvest.
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MILLIONS of new pensioners were warned this week that they face a retirement of poverty after weeks of slashed annual payouts.
Pension companies have cut rates offered on their guaranteed annuity incomes 24 times since the start of summer.
Standard Life is the latest to do so, lopping five per cent off the rate offered to the newly-retired and those approaching retirement.
And male pensioners will suffer an extra blow later this year with the introduction of the EU’s new “gender directive” which will further force down annuities for men.
Craig Palfrey, founding partner of independent financial advisers Penguin Wealth, said: “Annuities are in meltdown. We’re way beyond red alert. They have been coming down relentlessly and Standard Life’s decision to take a sword to rates is just the latest example.
Twenty years ago a £100,000 pension fund would have guaranteed an income of £15,640 a year for life for a 65-year-old man. Now it is just £5,140 a year.
And the crisis decimating pensions is set to continue for months, perhaps even years, piling on the agony for the newly-retired.
Experts warn that the situation is likely to worsen as annuity providers struggle with volatility in the stock market and the Bank of England’s quantitative easing (QE) strategy to tackle the recession.
The money-printing policy has been attacked for triggering “a death spiral” in pensions, which some experts say has led to the worst retirement payouts in history.
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Millions will see pensions slashed by up to 20% as new EU rules are set to send annuities plummeting
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Millions of people could see the value of their pensions slashed by up to 20 per cent because of new EU rules.
Those with a £100,000 pension fund could be more than £1,100 per year worse off in retirement because of the reforms, research has shown.
The Solvency II rules, which are due to come into effect in January 2014, will force pension funds to hold a higher proportion of 'safe' Government bonds.
As the bonds - called gilts - have such low rates of return it will drive down the returns on retirement fund annuities, which are used to pension income.
The reforms are designed to make pension funds safer and reduce the risk of them going bust.
Annuities, which set retirement income for life, have already fallen to historic lows because of the impact of quantitative easing.
At present, a pension annuity fund may invest 20 per cent in low-yield gilts and the rest in riskier corporate bonds which have a higher rate of return.
But under the new EU rules, annuity funds will be forced to hold a higher percentage of gilts.
New research by Deloitte suggests annuity rates will plunge by between five and 20 per cent when the directive comes into force in January 2014.
A £100,000 pension pot currently gives an income of £5,837, but once the regulations come into effect they will be between £292 and £1,167 a year worse off.
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SOARING inflation could plunge millions of pensioners into poverty as it cuts the real value of their funds by 60 per cent, worrying new figures reveal.
A typical pensioner on a fixed income will lose nearly £10,000 a year in spending power during the average 20-year retirement.
At least nine in 10 people with a private pension opt for a fixed-rate income in retirement – which means around 15 million people are facing a savings crisis.
Older people approaching retirement need to see their pension funds more than double over the 20 years after they finish work if they are to beat inflation, pensions giant Prudential has warned.
Analysts said pensioners are the victims of what is known as the “Silver” rate of inflation, because they spend a higher proportion of their income than the rest of the population on price- busting food and fuel.
Prudential’s figures show that the average person retiring this year expects an annual income of £16,600. If that income remains fixed, it will be worth a mere £6,700 in 20 years – effectively a £10,000 pay cut.
Assuming that inflation remains at its current level of 4.4 per cent, pensioners will need an annual income of just over £40,000 if they expect to maintain their standard of living for 20 years.
Ros Altmann, former government pensions adviser and director- general of the over-50s group Saga, said: “Older people are suffering higher levels of inflation than the country as a whole.
“Since 2007, pensioner inflation has been nearly 20 per cent. Pensioners’ annuity income has lost around a fifth of its buying power in just four years.
“Saga has been begging the Bank of England to take the plight of pensioners and savers into account. But our pleas have been ignored, as policy focuses on protecting borrowers and banks instead.
“The result is that millions of pensioners are becoming poorer and poorer each month as prices soar.
“Those not yet retired can keep working perhaps to try to protect themselves but those already retired on fixed annuities are in trouble.”
When workers retire they use their retirement pots to buy an annuity, which guarantees a regular income.
But pension experts say 90 per cent of annuities sold are “level” schemes because the types which rise with inflation are too expensive. Tim Gosden, head of product development for Legal & General’s annuity business, said: “The average UK pension pot is only around £32,000 which secures an annual income of £1,950 for a 65-year-old man based on current rates if the payments are not increasing.
“However, if they were to opt for a pension that increases by three per cent a year, then the starting income drops to £1,410, a 28 per cent fall.
“If full index linking is required the starting income drops to £1,173, a 40 per cent decrease. When faced with these figures, it comes as no surprise that many choose to have their cake now.”
Research by Age UK recently found that Silver – or pensioner – inflation has averaged 4.6 per cent a year since January 2008 – while the average annual inflation recorded by the Retail Prices Index (RPI) over the same period is 3.1 per cent.
Vince Smith Hughes, head of business development at Prudential, said: “Pensioners on a fixed income are particularly vulnerable when it comes to rising living costs. Our figures demonstrate the extent to which Silver RPI impacts on the spending power of those in retirement.”
Joanne Segars, chief executive of the National Association of Pension Funds, said: “While getting an inflation-proofed annuity will be more expensive than a ‘no frills’ approach, it’s a decision that demands serious consideration.
“The UK simply isn’t saving enough for its old age. Fourteen million people are set to retire on an income which they find inadequate.”
Wednesday August 31 2011 by Sarah O’Grady Social Affairs Correspondent – Daily Express - full article - http://www.express.co.uk/posts/view/268253/Pension-values-to-fall-by-60
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