Until 2002, when I began my journey to financial freedom, I thought I would have to work until I dropped down dead. And if I had to rely solely on my pensions, then that’s still the situation I would find myself in, even after nearly a decade of improving my own financial intelligence. Someone wrote to ask me about SIPPS earlier today when I had already planned to write on this topic. That’s life for you, isn’t it?
Pensions. Is that the dullest and most unsexy word and concept on the planet? I thought it was until I was in my Fifties, and even now it’s still pretty dull but don’t look away as I think I have some useful thoughts to share which may change all our minds.
First off, some context.
I DO have a couple of pensions I have managed to contribute to now and again during my 34 years of self-employment but combined their value is less than the £18,000 which on my sixtieth birthday in 2015 I will be able to draw in entirety, in one lump, under the “trivial commutation” rules. How very dare they call my pensions trivial? But that’s what they are if I am to be brutally honest with myself.
How could I have failed to look after myself better than that? I know the answer is the tough times during which I have toiled at the altar of self-employment, struggles with cashflow and the inability to afford pension contributions; the denial one goes through in earlier life that one will ever be old and the tedium of the topic generally. Always something more cool to spend our cash on, right? Wrong!
But 60 isn’t old these days and I look forward to my lump sum and being able to do something interesting with it which will contribute towards my wealth in later life. For, to be honest with you, that’s not really what Friends Life (formerly AXA) and AVIVA (formerly Norwich Union) have done with my funds over the years they have been in their control. In one case, what started out as £6662 in 2001 is now worth £10698 and I am not going to complain about that one since the other one, over the same period, has gone from being £3847 to the rather dismal £2115 today. I shan’t point a finger, though many would, because frankly I have also neglected my pension during those same years and if I don’t care about my own money, why should they? Apart from the fact that it’s their job, obviously.
So reviewing the situation, as Fagin might say, I used the Government Gateway recently to get a forecast of what my State pension might be worth when I get to 65, or 67 as I think it now stands for a woman of my age. The answer was inconclusive but – in current day rates – it would be something between £102 and £137 a week. Not to be sniffed at, but it ain’t going to cut it either, is it?
I looked at my current outgoings, already stripped back to the bone due to the current global financial meltdown situ and out of JM-like prudence as is my wont these days, my slash and burn policy of January 2010. I made some assumptions, and pretty gritty ones they were too. I tried to put myself in the shoes of an OAP in ten years’ time (goes much faster as this stage of life too) and I decided I couldn’t afford to drive on £137 per week so I cut out the cost of owning, insuring and driving a car. Then I cut out the cost of my mortgage. The concept here was that most OAPs have paid off their mortgage by the time they retire. I won’t have done but again that’s another story for another day.
So, no mortgage and no car, that leaves water rates, gas, electric, food, bank charges, service charges on my flat, council tax, contents insurance and servicing the boiler. So that’s no fun, no holidays, no prezzies, no eating out, nothing to look forward to and still those items add up to £225 per week. I couldn’t get them to go any lower and I live in a flat which is efficient and modern and cheap to run, light and heat. So that’s going to leave me with a weekly shortfall in 2017 of somewhere between £88 and £123 per week.
Now, depending on your viewpoint, this either sounds like a little or a lot. And I have tons of ideas in play so I know it won’t come to it for me, but it could for many, couldn’t it? And that’s even before we look at those poor sods who have worked for 40 years in a “proper” job and paid their pension contributions every month and had them matched by their employers, only to retire at some point in the last few years to discover they had precisely nothing at all, thanks very much. Keep on working, love. Get a job at B & Q, they favour our silver power and wisdom.
But I’m only 56 and on a gap year ‘cos I’ve already had enough of working. So what’s to be done?
Assuming you have read this far and you are much younger than me, say a teenager, or in your twenties, thirties or forties, lucky you. The earlier you start with this pension stuff, the better off you are, especially if you are in a job. Frankly, the sort of pension you get in a job where your employer at least matches or betters your own monthly contribution is the only sort worth having, as that makes enough over your working life to leave you with a decent pension pot at the end, assuming you start on your first day at work in your teens or twenties. Honest. It takes that route and that long, things being as they are.
I saw someone say on TV recently that if you start contributing in your teens and twenties when you first go to work, you can get away with putting only 10% of your earnings into your pension. This is something everyone can afford and must afford. If you wait just a decade until your thirties, that increases to 20%. In your forties its 30% and in your fifties its 40% so that’s a useful rule of thumb which demonstrates memorably that the longer you leave it, the worse it gets. Just like the dentist really!
Martin Lewis, the Money Saving Expert, puts it another way on his website; take your age and halve it and that’s the percentage you should be contributing. Thus if you are 32, its 16%. Already beginning to be quite a lot by the time you are only 32, when you might be trying to get on the housing ladder, get married and have a couple of babies. Sigh at the impossibility of it all.
So, is there any hope for those of us who are now self-employed and have failed to provide sufficiently? Yes! And this is where it starts to get more interesting. If I were a younger woman, I could take those diddly squat bits in my two pensions and transfer them into a SIPP (self-invested pension plan). What’s so cool about that? The difference is that instead of leaving it to the pension company to aim for a 5-8% return per annum for you, which sometimes they achieve, and sometimes they do not, you get to decide what to invest in. Gold, overseas property, commercial property, funky modern investment concepts, and more.
If you have ever had a job in your past, you might already know you have a pension. It’s worth fishing out the paperwork and finding out what the transfer value of the plan is. Depending on the answer to that question and your age, if you move it into a SIPP then you have a pot of money you can control to create a pension, starting from any age. Free money to invest with. Money you can’t touch until you are of “retirement” age, but nevertheless you can use it to make investments. This is very cool. You will not be on your own doing this. I can introduce you to SIPPs experts who will help, support an advise you.
Just like pensions, the value of your SIPP can go up as well as down depending on the investment choices you make. But as I said earlier, no-one cares about your money like you do and you could have a lot of fun with this and probably not do any worse than your pension languishing where it is, quite the reverse in my opinion. Recently clients of mine have discovered they have £14k, £65k and nearly £100k in their pensions from jobs they had so long ago they had almost forgotten about them. You can transfer that fund into your SIPP, control it and top it up.
The gig then is to divide your fund between low, medium and high risk investments which return accordingly. For instance, I currently know of something which returns 4.166% per month. Yowser! That’s fifty per cent a year. I bet your pension isn’t doing that, right?
Perhaps the best thing about a SIPP for me is that unlike a pension, it doesn’t die with you. When my father died, his pensions transferred to my mother. But when she died, they died with her, so nothing for us. When I die, my SIPP wouldn’t die; I can leave it to whomsoever I like. So the money isn’t lost or wasted if you die before you are 110 and have enjoyed full benefit from it.
SIPPs could be an easy introduction into investing for all of us and give you a free pot of money to use for that purpose. Leaving your pension where it is might also be a good idea if you have a final salary scheme which the SIPP folk think they are unlikely to guide you to improve upon. But it doesn’t cost you anything to find out. Use the contact form to send me details of the transfer values of your pension(s) and your age, and I will put you in touch with my team of SIPPs experts.
Do it today. The sooner you start this, the greater the benefit and the more fun you can having learning to invest for your future.