Your pension questions answered

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Tom McPhail
Image caption,
Pensions are among the most secure ways to save, says Tom McPhail

The financial decisions we take early in our working lives can have a significant effect on our income when we are older.

At least seven million people are not saving enough to earn the pension income they want or expect in later life, according to a government report on the issue.

Last week, we asked for your questions about how and why to save for a pension.

Here, Tom McPhail, head of pensions research at Hargreaves Lansdown, answers a selection of those questions.

Q: As someone aged under 25, is it better to save towards moving onto the first step of the property ladder or to instead put that money into a pension? I cannot afford to do both but appreciate the need to save. Catherine, London

Buying a property is very rarely going to be an effective substitute for building up a pension fund to pay for your retirement.

Ultimately you will need to invest in a pension and the earlier you start the easier it will be. One option is to start saving money in an Individual Savings Account (Isa) for now and see where you get to over the next couple of years.

Q: I am 22 and want to save for a pension but in the past few years I have seen a lot of news items on pension funds and banks going bust and I am worried about losing my savings and ending up with nothing. Can you recommend a low-risk way for me so save for retirement? Amy, London

No solution, from stuffing the money under a mattress to saving in a bank, trusting the government or investing in a pension is entirely free of risk.

Pensions are tightly regulated and have very specific legal trust structures in place to protect investors as far as possible. Get a pension, take advantage of the tax breaks and spread your money across a number of different investment funds in order to reduce the impact of any one of them performing badly.

At your age you should embrace investment risk rather than avoid it; there is plenty of time for lower risk strategies as you get closer to retirement.

Q: I am 30 and three years ago I enrolled in my employer's defined-contribution pension scheme which offers choices on how to invest. I worry about the volatility of shares etc so put 90% of my contributions into cash for safety. However the rate of interest is tiny. Is it better to go with the "default" plan offered by pension companies (seems to invest in shares for most of the years) to get a potentially bigger pension, or should I stick with my gut instinct but risk a smaller pension when I retire? James, Manchester

Objectively I would argue in favour of equity investing; over the next 30 to 40 years you will probably be lucky if cash even maintains its value relative to inflation.

I suggest that you go with the default fund for now, accepting that it may go down as well as up and try to familiarise yourself with how your money is being invested over time.

Q: I am 30 year old female and have been paying into a final pension scheme fund for the last 8 years. Given the decline in the availability of final salary schemes and the planned changes to final salary schemes in the future, is it wise for me to be saving more or will I be ok with the scheme I am currently in? Rebecca Marshall, Mansfield

If you can afford to top it up then it may be wise to do so. I suggest you consider using an Isa if you want flexibility or a Sipp if you are happy to commit money to a pension now, trading off the loss of access for the immediate tax break.

Q: I save money each month and put it in a bank account. Interest rates are so low at the moment that it is hardly growing at all but I do not know where to start in terms of looking for a pension fund to invest in. Do funds generally pay back more over the years than a savings account? How would you find out what scheme would suit you? I am looking for something low risk. Alison, Edinburgh

Investment funds cover all variations of investment assets, from money market funds (essentially cash), different types of bond funds, UK and overseas equities, commodities and so on.

Over time I would expect a multi-asset managed fund, an equity fund or a bond fund to return more than cash. Cash produces low returns because it is very secure.

Q: My daughter has low earnings and is naturally exempt from National Insurance. However, she wants to contribute voluntarily at £2.40 per week. She is 33 and can see the pension age moving further and further away with the government moving the goalposts. Is it still worth her making a voluntarily contribution, or put the money into a cash Isa? Michael Ford, Swanage

Hard to say without knowing more. The state pension is a good deal. However with the qualification period now only 30 years, there is the risk that you will end up buying years that you would have got anyway.

Does your daughter expect her income to increase in the future? An Isa may be the simpler and safer option but the state pension could produce a better return. Perhaps wait and see what the government comes up with in terms of its plans for state pension reform next year.

Q: I have just started to contribute to my company pension at 30 with a total of 225 pounds including the government tax back going into the fund each month. I have been told that 30 is a little late to start a pension, should I be investing in a second private pension? Adam, London

You may well be able to make additional contributions into your main scheme and if you can this may be the best option, simply to keep the paperwork down. If you cannot then look at a stakeholder or a Sipp to top up your main scheme.

Q: I am 31-years-old and have only just started earning enough to live comfortably, as I would define it. I am trying to save, but I have (a) the obvious concerns about retirement, (b) student loans to pay for which interest is accruing, and (c) I would like to buy a flat, which I know is a good investment in the long run. But I don't know how to prioritise these things, and I am not so young that I can put this off for any longer. What would you suggest? Cat, London

Does your employer offer a pension contribution? If so then take it. Make sure you have built up a cash reserve that you can tap into in emergencies. This should be at least three times your monthly income.

An equity Isa is a good way to get into the saving habit but if you can also direct even a modest monthly amount into a pension too then that will help to tackle to cost of paying for your retirement. The minimum contribution to a stakeholder pension is just £20 a month.

Q: I am 27 and have never made a pension contribution. There is no pension scheme at my work. What are my options? If I take a private scheme do I miss out on the tax break that my peers will get with their employer based schemes? Holly, London

There will be a workplace pension along soon as over the next few years all employers will be required to bring their employees into a pension and to make a contribution for them.

In the meantime if you do start a pension you will still get tax relief. This means that if you pay £80 in, the government will top it up to £100. This applies across all private pensions.

Q: I am 33-years-old and self-employed since 2007. I am paying only National Insurance contributions towards my pension. Is that enough to survive in old age? Dorothy, Scotland

Almost certainly not. Typically you should be saving at least 10% of your regular income to stand any chance of building a decent pension and perhaps double that if you want a good one. Bear in mind that you'll only get a basic state pension and even if you qualify for the maximum basic state pension this still only amounts to around £5,000 a year.

Q: My girlfriend will be taking time off to have a child soon, and is not expected to return to work for a while. She does not currently contribute to any pension. What is the best way for her to start a pension? And can I contribute to it on her behalf? We are both 25. Matthew T, Cambridge

If she can join her employer's pension that may be a good place to start. She can make her own contributions but if she has no earnings in a tax year she will be limited to £3,600 a year in contributions; you can make contributions on her behalf.

Q: I paid into a company pension for 35 years before the company went bust and took my pension with it. So how can I advise my children to contribute a percentage of their hard-earned income into a company scheme following my experience? Peter Williams, Somerset.

Pensions are held securely in trust for the members and are also now supported by robust compensation schemes. No financial arrangement has an absolute guarantee (even governments renege on their promises) but pensions are one of the most secure ways to save and come with generous tax breaks.

Q: I am a trainee accountant earning under £16,000 per year. I would like to start a pension as soon as possible as I am 23. I would like to make the payments myself and not rely on my employer. Have you got any recommendations? Nigel Newman, Ditton, Kent

If your employer offers a pension contribution then it almost certainly makes sense to join their scheme in order to receive the benefit of their contributions.

If you want a simple scheme then go for a stakeholder plan. If you want investment choice and flexibility then look at a low-cost Self Invested Personal Pension (Sipp).

Q: I am currently a PhD student, and will hopefully graduate when I am 27. I hope to stay in academia, which is likely to involve moving jobs and potentially countries every couple of years, at least for the first five to eight years after graduation. I have some savings but have never saved specifically for a pension, and really have no idea where to start. What advice can you give to someone like me who'd like to save for their old age but doesn't have a stable, long-term job? Kate, Southampton

If you are offered an employer's scheme with employer contributions then it is still probably worth joining in spite of your expected job mobility. The money is likely to come in handy later.

If you are happy to tie money up in a pension and want an individual arrangement then look at a Stakeholder or a Sipp. If you are concerned about locking money away at this stage then perhaps use an Individual Savings Account (Isa) for now and look to roll the money into a pension later.

Q: I am 29 and have been working in the public sector and paying into the Local Government Pension Scheme (LGPS) for two years. I am aware that a job for life is probably a thing of the past and that at some point I am likely to move out of the public sector. Am I best keeping the LGPS until I leave or should I get a commercial pension to invest in throughout my working life instead of or as well as the LGPS? If I should get a commercial pension instead of or as well as the LGPS what should I be looking for? Kate Edwards, Loughborough

Do not ditch the LGPS. If you want to run a pension alongside it then you can. If you want a simple top up arrangement then look at a stakeholder which has reasonable investment choices and low charges. If you want investment choice and control then look at a low-cost Sipp.

Q: If I start a pension scheme with an employer and then swap, what happens to it? Can I continue with the same scheme or will it get changed over, and how hard is that to organise? Is it better to go with something like a union scheme, which would follow me wherever I went, if I am likely to be moving jobs or should I be deciding on other criteria, and what are they? Isabelle, York

Generally when you leave a job the pension you have built up gets preserved within your old employer's scheme. If it is a final-salary scheme it is generally best left there.

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Young people are facing a range of financial pressures

If your employer was running a group stakeholder, Sipp or personal pension scheme then you may well be able to take it with you and keep on contributing. Remember if your employer offers a contribution you should take it.

Q: I am a 23 year old postgraduate researcher. I am earning enough money to start saving for a pension but am not sure how to go about doing this, or what the best option is as there are no pension schemes offered to us by the university. I will be getting a job in three years' time so would want something that could be carried through into later life and in which payment breaks could be taken (should I come up with financial difficulties in the future). I am also aware my parents have had problems with their pensions - are they a secure investment or am I better off just saving in a regular bank account? James, Southampton

Most pensions offer flexibility over contributions these days so you should not have a problem suspending contributions if you want to.

Yes, pensions are pretty secure these days, with the money held in trust for the members. You could just pay the money into a bank account but it would be a terrible waste.

Take advantage of the tax breaks and invest for the long term; take risks, invest in equities, there is plenty of time to be cautious later.

Q: I would like to start paying into a pension - I am 26 - but I do not know how long I am going to stay at my place of work, so I have held off joining the organisation's pension scheme. I did not want to sign up only to leave a year or two down the line.

But if I did join is it easier now to transfer your pension over when you move to a new employer. The scheme offered at my place of work is a defined contribution scheme and fairly new which is why I think it may be more flexible than pensions of the past. Joe, East Sussex

First of all make sure you have at least some reserve of cash to cover emergencies, thereafter it makes sense to join the employer's scheme. Defined contribution schemes are indeed fairly flexible and you should be able to move the money on to a new pension in the future.

Q: I am a 36-year-old staff nurse working for a private nursing home that currently has no pension scheme. In the coming year, I am seriously considering allotting a portion of my salary towards a pension but I do not know where to start or what private pension scheme would best suit me. Most of my friends work for the NHS or council hence theirs is set for them and they are quite generous.

Also, are they safe? I heard some stories, especially during the financial crisis, that some of these pensions evaporated during the height of the crisis. N Lopez, Edinburgh

Yes pensions are safe; they are held in trust for the members. Nothing is 100% guaranteed, not even government promises, but pensions are subject to strict legal and regulatory controls to ensure that investors' savings are held safely.

You may be offered an employer contribution in the future, until then look at using a stakeholder pension if you want somewhere simple to start.

Q: Both my husband and I are in our 20s and work full-time, however neither of our employers offer a pension scheme. We recently bought our first home so feel now is the time to look into a pension scheme, but do not know where to start. I have heard of the NEST scheme, which I would certainly sign up for, but should I also be looking into a private scheme to supplement my retirement? A-M, UK

The NEST scheme will be very simple and very low cost. It will be available from 2012 onwards.

In the meantime you can start contributing to a pension now. As suggested elsewhere, if you want a basic, simple pension then look at a stakeholder plan. If you want investment choice and control then use a Sipp.

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