Hello, and welcome to the Morningstar Series, 'Ask the Expert'. I'm Emma Wall, and here
with me today is Alan Higham, Retirement Director for Fidelity. Hello, Alan. Hello, Emma. So
why is saving for retirement so important? Well, it is really very important because
people will not just want to live on what the state will provide for them. And for somebody
who is maybe 30 years away from retirement today, they could probably look forward to
the state, allowing them to retire in their early 70s with an income in today's money
of around about £8,000 a year assuming that the government doesn't cut it back any further.
So that really is probably just enough to keep you alive but not enough to give you
any sort of reasonable standard of living. And of course, because people are living longer,
at 70 you'll probably still be raring to go, want to fulfill your ambitions socially, maybe
even want to continue to work for a bit. So you need more than – well, at the moment
£100 a week, don't you? Well, that's absolutely right. And people will want to stay in work.
So it's not all about just saving a massive pot up and then starting to take it as soon
as you stop work. Quite possibly, you will want to carry on working and earn some money
to supplement the State Pension. But your ability to work in retirement isn't guaranteed.
And so, it's essential to have something to fall back upon because we don't know what
the futures holds. So, I'd strongly recommend that everybody start saving a little bit as
soon as they can possibly afford to do so. And what vehicles can we use for this safety
net? Well, the best way to do it is with your employer. If your employer is a large one,
above sort of 80 employees at the moment, they must offer you a workplace pension. And
over the next two years, all employers, even small businesses employing one or two people
will offer you a workplace pension that crucially your employer will pay into. You will be automatically
put into that pension scheme and, indeed, you will have to opt out and that really is
like turning down a pay rise from your boss. So unless you've got an extremely good reason
to do so, I'd encourage people to stay in and start the saving discipline. Put a little
away now. Put a bit more away as and when you can. And there's also a third contributor
to this workplace pension, isn't there, and that is the government also giving you this
free cash basically? Yeah, that's absolutely right, because if you weren't paying into
a pension, you'd have more wages that were suffering income tax. Your contributions get
full relief from income tax. So if you are a 40% taxpayer, you avoid paying 40% tax on
your pension contribution, the chances are, when you come to take it, you probably only
pay 20% tax. So, it's really a very beneficial tax break that everybody should take advantage
of. And other the workplace pensions, what other pension schemes can individuals use
to build up that retirement pot? Now, for many individuals, they aren't actually formally
employed; they might be in a partnership, they maybe self-employed, sole traders, they
have to take responsibility themselves and set up a personal pension. And the most common
one is the self-invested personal pension (SIPP), and they are very low cost today,
very accessible online, and you can choose whatever investments you like. So, it needn't
cost a fortune to start. You can save a very little amount each month and make a real difference
to your retirement. And with these SIPPs, of course, you're not getting employer contributions,
but you are still getting that tax relief? Absolutely, Emma, you are. You are still getting
the tax relief. It works slightly differently if you're a high rate taxpayer, because when
you contribute, say, £80 into it, the government automatically adds it up to a £100. So that
gives you your basic tax relief back. If you are a high rate taxpayer, you have to claim
the extra tax relief by yourself by filling in your tax return. Sadly, quite a few high
rate taxpayers don't realise this and don't claim it back. The Inland Revenue actually
benefits from quite a lot of unclaimed tax relief here. And what about the rules changes?
Because we've heard rumours that things – allowances are being reduced. What should people do about
that? Yes. There is a constant debate about the generosity of pension tax relief that
favours high rate taxpayers. And a number of political parties have made noises about
limiting that in the future. So, there is a general election coming up in May next year.
I don't expect anything to change before then, but after then, things might change quickly.
So, people could choose to make more pension contributions sooner. If you haven't made
contributions in the past, you can use unused allowances and make bigger contributions now.
Particularly, the over 55s could think about the balance between ISA and pension, because
under the new rules next year, over 55s can access their pension very freely. So they
are not locking it away, so that they can't access to it. So, balancing the tax relief
on pensions, versus the flexibility, is one thing that I'd encourage over 55s to think
again about in the on the ISA versus pensions debate. Alan, thank you very much. Pleasure.
This is Emma Wall for Morningstar. Thank you for watching.