As the Government announces a crack-down on “rip off” charges that are shrinking people’s pension pots, Vicky Shaw looks at the importance of putting money aside for the future.
Recent weeks have thrown up a series of stark reminders that we cannot be complacent about having enough money in our later years.
Firstly, the Government has unveiled proposals to clamp down on charges for managing people’s retirement savings pots. Variations in these charges may look small, but they can eat up huge sums from the amount you eventually get when you retire.
A consultation paper proposes to limit the charges that providers can levy for managing a pension pot to a maximum of 0.75 per cent a year.
Other options being considered include a higher cap at 1 per cent, or a ‘two-tier’ cap where most funds are limited to 0.75 per cent but can go up to 1 per cent if they can justify to the Pensions Regulator why they should be allowed to charge more. Any final cap might lie somewhere between the two levels suggested.
These percentages may look pretty insignificant, but even adding a fraction of 1 per cent to an annual charge can wipe tens of thousands of pounds off your eventual retirement fund.
The Government has said that someone who saves £100 a month over a typical working lifetime of 46 years could lose almost £170,000 from their pension pot with a 1 per cent charge, and over £230,000 with a 1.5 per cent charge.
A pension saver with a 0.75 per cent annual charge on their pension pot could eventually end up £100,000 better off than if they had been charged a rate of 1.5 per cent.
Once the new rules are finalised, they will be introduced next year, as landmark reforms automatically placing people into pension schemes continue to be rolled out.
Automatic enrolment will eventually see up to nine million people either saving into a pension for the first time or putting more aside as companies are phased into the initiative over the next five years.
The programme was launched last autumn with larger firms, which tend to have more experience of pensions and also have the clout to negotiate good deals for their workers.
Pensions Minister Steve Webb has raised concerns that smaller employers could struggle to negotiate the same low charges from pension providers that larger companies have been able to, or that they may use high-charging older pension schemes.
These moves have come amid warnings from financial experts that people who are pinning their hopes on an inheritance windfall to fund their old age could be relying on a risky strategy.
Recent Office for National Statistics (ONO) research has shown that an estimated £75bn worth of assets, including cash, property and jewellery, was handed down in wills in Britain between 2008 and 2010. But three-quarters of these assets went to just one-fifth of those who received an inheritance over this period.
Looking at what’s in store in the coming years, the research said that a peak of seven in 10 (69 per cent) people owning their own homes in 2001 could leave more people with assets to pass on to their children.
But it also warned that future generations are likely to see their inheritance pots evaporate due to the costs of caring for an ageing population. The report said that such expenses “are likely to diminish, if not exhaust, assets which might traditionally have been passed on to others”.
Another piece of research also raises new concerns about our retirement saving habits.
A report from Scottish Widows has found that more than a third (37 per cent) of women have no private pension, while for men this figure is just over a quarter (27 per cent).
Don’t put all your eggs in one basket for kids
Deciding where and how to put money aside for a child can be a daunting task.
Jason Bateman, head of portfolio management at Fidelity Investment Solutions Group, says that while there are no hard and fast rules, there are some factors which investors can consider.
Investors should ask themselves how much risk they want to take with their child’s money. Higher potential returns can also generate bigger losses, but if the fund takes low levels of risk, you might struggle to see meaningful returns once fees are taken into account.
Bateman says parents should also bear in mind that while children can’t access the money from their Junior Isa until the age of 18, a Junior Isa can be rolled into an adult Isa, so the investment horizon can be longer than their 18th birthday.
Bateman says: “Be prepared for the worst and don’t put all your eggs in one basket.
“A good long-term investment strategy is to diversify across multiple asset classes, from equities to bonds, and across different regions from the UK to emerging markets.”
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