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Planning for Retirement
Central Press Features (October 1998)
The closer you get to retirement, the more urgent it becomes to take a long hard look at your financial affairs.
The value of the state pension has been declining for some time and now provides only for the very basics. Even
those of us who have taken steps to top up our retirement income may still find it falls short of what we need
to live in comfort. Market research suggests that around a third of retired employees currently endure financial
hardship. The figure for the self-employed is over a half. So what can you do to ensure that you don’t become one
of them?
One of the most tax-efficient ways of saving is to invest as much as you can in a pension. Although the income you
eventually draw down will be taxed, the contributions you make now are exempt, adding considerably to their worth,
especially if you are in the higher tax bracket. People who belong to a company scheme, can make additional voluntary
contributions (AVCs) totalling up to 15% of their net relevant earnings. For personal pensions, contribution limits
increase with age, rising from 17.5% of net earnings below the age of 36 to 40% at 61.
Unfortunately, even if you invest the maximum allowed, it may still not be enough, particularly if you have left it
rather late. On a more encouraging note, middle age is the time when the mortgage nears its end and the children
leave home, freeing up money that can be put to profitable use.
Any scheme offering tax advantages should be at the top of anyone’s shopping list. April 6 1999 sees the introduction
of the new ISAs or Individual Savings Accounts. Allowing investment of up to £7,000 in the launch year, £5,000 per
annum thereafter, these will be split into three components – cash, life insurance and shares or unit trusts.
In the meantime, the more generous allowances afforded by Peps and Tessas are still available, but time is running
out if you are to beat the April 5 deadline. Bearing in mind that interest rates may fall, a Tessa (Tax Exempt Special
Savings Account) is the more secure option. Running for five years, it allows an investment of £3,000 in the first year,
£1,800 in subsequent years up to a total of £9,000. For the more adventurous, a Pep (Personal Equity Plan) could
bring greater returns, although it is important to be aware of the risks. These are most acute if you take out a single
company Pep (investment limit £3,000) since you are, in effect, putting all your eggs in one basket. This is why most
people favour a general Pep (investment limit £6,000) which spreads your money over a range of equities. If recent
stock market scares make you nervous, a corporate-bond Pep is an attractive alternative...
© Alison Thomas
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