When it comes to pensions, we are told to start accumulating as early as possible. But what if life didn’t pan out like that for older clients? Simoney Kyriakou investigates
Save as much as you can, as early as you can: this is the crux of most pensions engagement strategies, attempting to get millennials thinking in their 20s about how they will fund themselves in their 70s, 80s and 90s.
But for many clients in their 50s, pension saving may not have been possible until later on in life.
Reasons might include starting a career after the children have grown up and left home, or becoming self-employed.
It could also be the case that someone has not been working because their partner was the breadwinner, but they have now split up or divorced and suddenly feel the burden of being financially responsible for themselves.
Aviva’s latest Real Retirement Report has revealed many people over 50 are relying on downsizing to fund their retirement.
Some 24 per cent are hoping for an inheritance, while 13 per cent are banking on a lottery win.
According to the report, which surveyed more than 29,500 adults in the UK, a significant proportion of over-50s still in work – equating to 2 million people – said they were yet to take pension saving seriously.
Given these stark warnings, is it too late for them to start saving into a pension?
According to Vince Smith-Hughes, director of specialist business support for Prudential, “while we always advocate saving as soon as you can, and as much as you can, it is not true that if you have left it til later in life then there is no point doing it.
“Even if you are 50 and looking to build up £100,000 by 67, they can still do so by saving £376.37 a month gross, assuming a net return of 3 per cent, net of charges at 0.25 per cent.”
Where circumstances allow, carry forward can be an invaluable tool for boosting a pension in a short space of time. - Jessica List
This would work out at £301.10 net to a basic rate taxpayer and £225.82 net to a higher-rate tax payer.
Jamie Clark, business development manager for Royal London Intermediary Pensions, agrees. He says: “Although some people might think it is too late to save in a pension, in fact, it is never too late – especially when the tax breaks available are taken into account.”
Currently, tax relief is a major reason for people – even in their 50s – to start taking pension saving seriously.
Alistair McQueen, head of savings and retirement at Aviva, comments: “When it comes to working hard, it is tough to beat a pension.
“Every pound you save in a pension benefits from the boost of pensions tax relief from the government, regardless of age.”
While tax can seem complicated, there are ways to help clients understand how the various reliefs can help maximise their savings.
A simple way to explain the tax relief in, tax out rule to clients, is that: “when saving in a pension, the fund also grows tax free. When deciding to take money out, up to a quarter is normally available tax free,” according to Mr Clark.
Jessica List, pension technical manager for Curtis Banks, agrees tax relief is an essential element to discuss with clients when it comes to pension saving. Moreover, there are ways to incorporate wider tax planning into an older client’s retirement plan.
She comments: “Where circumstances allow, carry forward can be an invaluable tool for boosting a pension in a short space of time.
“The current annual allowance may be much lower than it was only a few years ago, but carry forward still allows individuals to make large one-off contributions and make up for some lost time.”
An adviser may want to change the investment strategy to help maximise diversification and minimise market risk - Vince Smith-Hughes
Andrew Pennie, head of pathways for Intelligent Pensions, recommends people who are self-employed, regardless of age, should also consider other tax-advantaged investment vehicles, such as Isas, to help save as much as possible in a tax-effective way.
He explains: “For the self-employed, the onus is very much on them and them alone. If not paying tax at the higher rate, the self-employed may wish to consider Isas as well as pension saving.
“This is particularly helpful if there is a chance of becoming a higher rate tax-payer in the near future and benefiting from higher tax relief.”
For those who are not self-employed or self-funding, the workplace pension is currently an excellent way to not only benefit from tax relief but also to double or even triple your clients’ pension contributions.
“If they are still working and in a matching employer scheme, they will have the benefit of employer contributions,” says Mr Smith-Hughes. “Some people might think it is not worth paying in so near to retirement, but even if they can, they should because it will help provide a healthy return.”
Mr Pennie comments: “Another big driver for making pension contributions is auto-enrolment and the fact that employers must contribute to a pension for you.
“By not taking up this pension option you would effectively be giving up free money.”
Mr McQueen states: “Every pound you save in a workplace pension should benefit from an additional contribution from your employer, regardless of age.”
Therefore even if the initial contributions are modest, as is the case with auto-enrolment, it is still worth it for the sake of the matching employer contributions.
Mr Clark adds: “Even if it's just a modest amount saved, the government will pay in a bit extra in the form of tax relief and if an employee, then an employer will usually pay in as well. So always good to max out on any employer pension contributions available.”
There can be a fear among those starting to save in later life that a serious market shock could wipe out their savings, especially as with defined contribution pensions in the workplace, the burden of investment risk is borne by the member, not by the scheme – unlike the old defined benefit schemes.
But according to Mr Smith-Hughes, clients should not fear this too much. He explains: “If you are looking at a 15-year investment term, even if there is a market shock, this could work in the saver’s favour because of pound-cost averaging.”
This means an investor can get more for their money when stocks are cheaper due to a market shock, and accumulate more in advance of a market upturn.
By helping your clients to act today, they will be better placed to thrive, not just survive, in later life - Alistair McQueen
However, “if you only have five years until retirement, this is not such a pleasant nuance”, Mr Smith-Hughes says, but then again, if more clients intend to stay invested after their retirement date, by choosing drawdown, then there will be more time for their portfolio to recover somewhat.
“Obviously there is sequencing of returns risk, and an adviser may want to change the investment strategy to help maximise diversification and minimise market risk,” he adds.
So how much to save?
According to a rough rule of thumb, Mr Clark says people should save half their age as a percentage of earnings.
“For example,” he says “A 50-year old should be saving 25 per cent of their earnings. This might seem daunting but saving even a little, often and increasing this when finances permit, for example when given a pay rise, will help to provide a tax-efficient nest egg for the future.”
According to Mr Pennie, the only real restriction with pensions is the age pension savings can be accessed, which is currently 55.
But he states: “A late starter should probably be looking for their pension savings to be invested way beyond age 55 to build adequate retirement resources.
“Before starting to save, I would encourage people to devise a plan: What is their state pension forecast?; When do they plan to retire?; Is there any outstanding debt which should be cleared first?; What other savings and investments are available?; How much income is needed in retirement?; What will any workplace pension offer?; What current affordability is available?”
For this reason, Mr Clark says: “It is important to talk to an impartial financial adviser, if possible, to ensure the best financial decisions are being made.”
But, as Ms List comments: “If access to advice isn’t possible then the individual should consider their future retirement income needs, with their future capital needs and repayments of any debts.
A late starter should probably be looking for their pension savings to be invested way beyond age 55 to build adequate retirement resources - Andrew Pennie
“Looking at retirement income alone, there are two key starting points: take advantage of any available employer pension contributions by joining the company scheme if there is one, and obtaining a State Pension Forecast to get an accurate idea of State Pension Income and certainty around the age at which it will be paid.”
Mr McQueen agrees there are simple steps the average 50-year old can take. He says: “It is never too late to save, and the relatively short timeframe to eventual retirement can help focus the mind.
“A sensible first step is to understand your pension today. Request a free forecast from the government to understand how much you will be entitled to from the state, and from when.
“Also, clarify how much you have in private savings today, and the income this could provide at your eventual retirement.
“Whatever your age, by helping your clients to act today, they will be better placed to thrive, not just survive, in later life.”
These various pathways should help the canny saver to be able to put a tidy sum away for their eventual retirement, even if they have left their pensions journey until much later in life.
Simoney Kyriakou is Content Plus Editor for FTAdviser