These notes apply to an individual who is looking to establish a personal or stakeholder pension. This may be because you are self-employed, in employment where your employer does not offer a pension arrangement, or perhaps where your employer has agreed to invest a certain amount and you are considering how much to add.

1. Payments Invested
Saving in pension plans is typically done in the following ways:

Regular Instalments (usually monthly) are popular because they provide discipline
One-Off lump sums - a particularly useful investment for the self-employed or higher rate tax payers
A Combination of Regular and One-Off Investments

2. Tax Considerations
Tax relief is granted on pension contributions (the effect varies if some income is charged at the higher rate):

Capital growth and income within a pension fund is almost tax free
For employees (and all stakeholder plans), basic rate tax is obtained by deduction
Self-employed people can claim back pension tax relief
The government lays down limits as to how much can be invested in a pension plan

3. Investment Options
Investors can choose from options depending on years to retirement, assets held and target retirement income:

Choice available on type of fund(s) in invested in.
Funds break down into three categories: unit linked, with profit and self invested
Pension providers have a wide range of funds available
Unit Linked Funds:
The principle of unit linked funds is that they are pooled funds linked to the performance of the underlying investments
Underlying investments are usually equities, i.e. stocks and shares, but can also be property, gilts etc.
With Profit Funds
Invest in stocks and shares and other assets
The fund manager tries to smooth out peaks and troughs by holding back some growth as a reserve
Fund aims to provide a smooth increase in value
Self invested personal pension (SIPP)
For those who can invest perhaps £15,000 or more a year, or who have a particular area of investment expertise
You decide upon the investments
Some restrictions on the type of investments a SIPP pension plan can hold
Ideal for the more sophisticated investor

4. Growth Assumptions

By law, when projecting pension fund values certain growth assumptions are made by pension providers. These are currently 5%, 7% and 9%. This is to ensure a ‘level playing field’ with competitive quotations.

Pension paid in retirement for remainder of lifetime
Pension amount stays the same or rises by inflation (or another agreed percentage)
The pension continues on for dependants after your death (typically at a lower rate)

5. How much should I invest?

As much as you can comfortably afford, as soon as you can without over-stretching
Make a commitment to a long term monthly investment
Actual amounts will be different for each individual
Consider your ideal “target fund” necessary to achieve a certain level of income at chosen retirement date in today’s terms
Review on a regular basis to take into account revised objectives, investment performance and changing annuity and investment conditions
The biggest mistake everyone makes is to under fund their retirement

6. State benefits?

State benefits increasingly form a major part of retirement income
We recommend getting a state pension forecast
Most people need additional income to maintain lifestyle

7. Other forms of Savings?

You should not necessarily concentrate all your savings into the one area of personal pensions
Personal pensions should form part of your overall strategy
Changes to pension funding levels mean that for many, ISAs are an equally good option (and more flexible) in earlier years

Swept away all the previous rules
Some protection was given to accrued benefits
There are winners and losers from the changes

9. Summary

Is the level of savings you are proposing realistic?
Do you prefer disciplined monthly investments or lump sum payments (or both)?
Consider how much you need to live on if you retired today
Concentrate on building up a fund for retirement - balance risk, reward and security
Consider different savings vehicles - don’t put all your eggs in one basket

These Notes ("How much should I save towards my Retirement") are intended to provide a general appreciation of the topic and it is not advice. Guidance should be sought from a specialist like ourselves qualified to advise in your specific circumstances.

For more information on Personal Pensions, please contact Cheltenham Independent Financial Advisers Limited on 01242 269656 or email us at info@cheltenhamifa.co.uk. One of our advisers will be happy to assist you.