Sipps: How to retire early on a DIY pension-Richard -Richard Evans

Sipps: How to retire early on a DIY pension

Thousands of savers have started a self-managed pension in recent months. Here's how to join them.

Savers can invest their pension in a range of assets  Photo: Howard Mcwilliam

Britain’s workers are waking up to the pensions crisis and taking matters into their own hands by setting up and managing long-term savings plans.

The number of people with self-managed pensions rose by 43pc in under two years at Hargreaves Lansdown, one of the biggest providers. Two years ago 102,000 of its customers had a self-invested pension but by March this year the number had reached 146,000.

These savers have been forced to take action to secure a comfortable future by a variety of big changes made by employers and the Government – and by the inexorable rise in life expectancy.

One of these changes is the demise of final salary pensions and careers for life, which gave many workers a guaranteed, index-linked and often generous pension without them having to lift a finger.

We are also starting to realise that we may be retired for 20 or 30 years, that the state pension is far from generous and that the new “automatic enrolment” workplace pension scheme involves such small sums, at least for now, that it is unlikely to make much difference to our income after we retire.

Finally, people have decided to manage their own savings because many can no longer afford financial advice, now that advisers charge upfront fees instead of taking a commission from the products they sell.
If you do want to start investing to build up your retirement savings, there are a number of ways to go about it. You could put money into Isas or increase contributions to a company pension, for example. But more than a million people have started a self-invested personal pension or Sipp since their introduction in 1989, although many run their Sipp with help from a financial adviser.
These plans offer a simple and tax-efficient means to save in a wide variety of investments, from shares and bonds to cash and even, for more sophisticated investors, assets such as commercial property.
Here we aim to guide you through the process of starting and running your own Sipp.

What are the advantages?

A Sipp is just a special type of pension, so you get a pension’s tax breaks. For basic-rate taxpayers the advantage of a pension over an Isa is the 25pc tax-free lump sum that you can take from the age of 55. Higher-rate taxpayers gain even more.
Choosing a Sipp offers the additional advantage of giving you control of your pension investments. You can buy and sell a wide range of assets within your pension at low cost whenever you like, normally over the internet.

How should I start?

If you are a first-time investor you’ll probably want the simplest variety of Sipp rather than the type that offers complete investment choice. But the basic ones, which are normally web-based and low-cost, still offer a huge choice of funds and shares, so you can build a balanced portfolio that suits your needs.

Who offers Sipps?

There are broadly two types of Sipp. One, more suitable for first-time investors, avoids offering esoteric investments, concentrating on funds and shares. These Sipps are normally, although not always, managed online; providers include Hargreaves Lansdown, Charles Stanley, Alliance Trust, Bestinvest, TD Direct and Sippdeal.

How can I choose the right Sipp company?

Consider the following factors: cost; how much help you will need from the company (most offer assistance by phone or email); how much research you want the company to provide to help you choose investments; and finding a website that you are comfortable using.

How much will it cost?

Unfortunately, comparing the costs of different Sipp providers is not straightforward. Some charge fixed yearly fees, others take a percentage of the value of your investments, while some charge when you switch assets. Think about the investments you will hold, how much they will be worth and how often you will change them before working out which provider will be cheapest for you.
“Don’t just look at the headline costs. Watch also for hidden costs such as charges for moving your Sipp to another provider,” said John Moret, the principal of MoretoSipps, a consultancy.
If you have a large portfolio, say more than £50,000, you will probably be better off at a company that charges a fixed annual fee or for each trade rather than one that makes its money by taking a slice of fund managers’ annual charges. Alliance Trust and Sippdeal are in the first category; Hargreaves Lansdown in the latter.

What investments should I choose?

This depends on your age, as well as your attitude to risk. The younger you are, the more risk it’s worth taking – over the long term shares tend to do better than bonds and cash, but be prepared for plenty of short-term swings.
“Long-term equity investment remains the most effective way to provide an income in retirement,” said Dominic Grinstead, the managing director of MetLife UK, the insurer.
First-time investors are always advised to buy share-based funds rather than individual shares, as this reduces this risk that you will be hit hard by the failure of one company. Experts recommend further reducing risk by buying a range of funds.
As you get older and approach retirement, it’s often a good idea to choose less risky assets. The last thing you want is to be exposed to a huge stock market crash just before you use your accumulated savings to buy an income for life via an annuity, for example.
Cash is safe, up to the £85,000 limit of the compensation scheme, but interest rates are so low that it’s hard to keep pace with inflation. Bonds are normally seen as lower risk, but many experts say prices are currently too high, thanks to distortions in the market caused by low official interest rates and quantitative easing.
Shares in stable blue-chip companies that pay decent dividends offer a good mix of resilience, income and potential for growth.
They may be especially suitable for investors who don’t want to buy an annuity when they need an income – annuity rates are currently very poor – but plan to live off the income produced by their investments instead. This option is called “income drawdown”.

What do I have to do once the Sipp is up and running?

In most cases the only thing you need to do once the Sipp is set up is monitor your investments and change them if necessary.
However, higher-rate taxpayers will need to declare any contributions to the Sipp on their self-assessment form in order to claim full tax relief, while those who make very large contributions or who have big pension pots should check that they don’t exceed annual and lifetime limits. These limits apply to aggregate totals across all your pensions, so take any others into account.
Monitoring investments is very important. “A pension is for life, it’s not a case of 'buy and forget’,” said Mr Moret, who has earned the nickname “Mr Sipp” for helping to shape the industry since its launch.
“Try to do what a professional investment manager would do, but don’t underestimate the time commitment this involves.”
Most online Sipp providers will give you a real-time valuation of your holdings.
At some stage you may want to transfer any other pensions you have, such as workplace schemes, to your Sipp – perhaps when you leave a particular employer and its contributions cease.

What about these more sophisticated options you mentioned?

“Full” Sipps allow “every investment that does not breach HMRC guidelines”, said Ian Hammond of Rowanmoor, one such company. Similar providers include Hornbuckle Mitchell and AJ Bell.
These firms generally require you to invest through a financial adviser rather than independently. As a result, you won’t need to manage them yourself over the internet.
Some of the more unusual investments you can hold in these Sipps include commercial property, as well as truly esoteric assets such as copyrights and other intellectual property, said Mr Hammond. Full Sipps cost more than the basic variety.
There is a list of all Sipp providers on the website of their umbrella group, the Association of Member-Directed Pension Schemes (ampsonline.co.uk).

I don’t want to use the internet. What are my options?

Some providers of “basic” Sipps will allow you to manage your Sipp by phone, although they may not advertise the fact. Hargreaves Lansdown, for example, lets you do everything over the phone or by post.

What are the drawbacks of Sipps?

Costs can be higher than for personal pensions, especially if you choose the wrong firm for your needs. The ease of trading can encourage Sipp owners to switch investments too often, potentially frittering away their savings in dealing charges.

What are the alternatives?

It’s worth asking if you really need a Sipp. A personal pension could be better if you are happy to leaves things to an insurer that will invest your money in a fund that simply tracks the stock market, or one that owns a range of assets to reduce volatility.
But Tom McPhail of Hargreaves Lansdown said: “Eventually all non-final-salary pensions will look like Sipps, as they offer all the advantages of other pensions with none of the drawbacks.
“The crucial magic ingredients are to present information regarding investment choices cleanly and effectively and to support the investor with easy to use administration systems.
“Provided that you have these two elements, a Sipp knocks spots off any other kind of pension.”

Culled from the Telegraph 

The Implication of the 15 to 18 percent increase in pension contribution and its impact in pension pot.

Odunze Reginald C

On July 1^st 2014, the current president of Nigeria , Dr Goodluck Ebele Jonathan signed the 2014  Pension Reform Act.  By the signing of the new law, it signifies the repeal of the 2004 pension Reform Act and according to the preamble of the act; the law will continue to govern and regulate the administration of uniform contributory pension scheme for both the public and the private sectors  in Nigeria.

But the subject matter of our discussion is the increase in pension pot, a pension pot is the total money in an individual pension account  or  the  total  retirement savings account in an individual RSA holder,  and so how long does an individual live that will usher in a good and profitable life during old age bearing in mind that old age comes with it numerous ailments associated with it, and so the pension pot is a very important part of the retiree life and according to Richard Evans of the Telegraph and I quote “So how much do we need to live on when we're retired? According to research from LV=, the insurer, a single person typically spends £9,900 a year in retirement (a couple need £17,900). The figure covers more than essentials, including such expenditure as drinks, restaurants, recreation and hotels” and I will to like add also medical and health bills as far Nigeria and Africans are concerned as Evans deliberately avoided medical bills because of Americans and European total care of old peoples medical bill.

Therefore the 3 percent increase  in contribution from 15percent to 18 percent is a step in the right direction as most retirees very often fall sick when they discover that their contribution is not enough to carry them through, the short coming in their expectation most often results in unhappiness which ultimately results in medical and health  related issues.

According to Mandi Woodrof in an article “7 ways  to retire  happy “ which appeared in Yahoo finance ,  Mandi noted that  “In a new book, “You Can Retire Sooner Than You Think,” Atlanta-based investment advisor Wes Moss, offers an alternative to the traditional line of thinking. Rather than focus on a dollar amount to reach for, Moss decided to figure out what retirees needed to be truly happy in retirement.”

“In 2012, Moss conducted an online survey of more than 1,200 workers who had either already retired or were fewer than 10 years away from retirement. He asked them questions about what type of cars they drove, where they shopped, how much their homes were worth, and, of course, how much they had saved for retirement. But he also asked about their passion projects, how often they went on vacation, what types of volunteering they enjoyed, whether or not they were satisfied with their lives, and how much time they put into their retirement planning before calling it quits. (Moss did not ask participants about overall debt levels like student loans and credit cards, but did include questions about their mortgage debt).
What he found was that more money doesn’t equate to more happiness. The happiest retirees didn’t all drive BMWs or take 12 European cruises a year, either” notwithstanding the research of Moss, it is observed that retirees with low pension pot often feel disillusioned and as such are constantly complaining of the pension of the pension scheme, based on the stories, reports of large scale operation that appears daily on newspapers as most of the people are not aware, that all those emanating reports are not of the new scheme. But continuing in his research, Moss deviated adding that the increase in pension pot increases the retiree happiness as stated in the number one factor for retiree happiness.

But Moss came up with one factor, he noted that “Retirees’ happiness hit a wall once they reach $500,000 in savings.”  That is a whopping 80 Million Naira based on 160 Naira exchange rate . But in as much as the situation and conditions  in abroad are quite different, a retiree having enough remittances in his retirement savings account also portends happiness in that regard. Though research has not been carried out in Nigeria in that regard but generally expectation of money creates more happiness than the spending. In  a research carried out in Alabama, it was discovered that most lottery players, gamblers are always happy until the result of lottery game. In a film titled, "It could be you" which portrays the happiness exhibited by lottery players shortly before the result, it shows that people tend to be happy on expectation of money than on the arrival of the money ,as most salary earners always feel happy before the arrival of the salaries and wages, but become more unhappy at its arrival as they discovered that so many issues spring up to consume the money. With the theory of happiness in expectation of money, It then therefore becomes devastating when a retiree expectation is far beyond what can see him through during old age.

Therefore the increase from 15 percent to 18 percent will go a long way in creating a sustainable and happy retirement  old age, this is because for employees that work in private sectors  who does not have an adequate  provision for accrued pension right , it becomes a terrible nightmare as the contributor prepares for retirement, for those in organized private sectors that has provision for accrued pension right and the governments sectors that provide for bond, they are better equipped than the counterparts in those sectors.

Therefore the government really came to the need and the aspirations of the contributors in that regard. In an article by Smarter lifestyle titled “ways to prepare for retirement”, it noted that” retirement can be expensive “and as such “it’s a good idea to schedule a meeting with a financial planner to get a ‘check-up’. It’s just like a doctor’s visit, and you should really talk about your present situation and future goals.”

The increase in contributions also means more money will be available for investment purposes in different instruments and that  will boost the economy  as the multiplier effect will likely increase within a very short period bearing in mind that “the Pension Reform Act 2014 also makes provisions that will enable the creation of additional permissible investment instruments to accommodate initiatives for national development, such as investment in the real sector, including infrastructure and real estate development. as is provided without compromising the paramount principle of ensuring the safety of pension fund assets.”Rueben Abati.

Finally the increase will also check mate some employers especially the unorganized private  sectors who are in the habit of not remitting the correct amount as the increase of 3 percent will have to manifest in their subsequent remittances.

Odunze Reginald C

Ways to Prepare for Retirement

Being financially secure in retirement just doesn’t happen magically. It takes lots of planning, time and savings.
Some scary facts about retirement:

• More than 50% of persons do not have enough finances for retirement.
• 25% do not participate in their company’s retirement plan.
  
• The average person spends 20 years in retirement.
  

Here are some tips to help you plan correctly:

1. Talk to a financial professional. Every few years, it’s a good idea to schedule a meeting with a financial planner to get a ‘check-up’. It’s just like a doctor’s visit, and you should really talk about your present situation and future goals.
2. Save, save, and keep on saving. Make it a habit to save as much as you can.
   
3. Learn your retirement needs. Retirement can be expensive. Learn from today how much you need to save for your retirement. Talk to a financial planner, or find an online retirement calculator.
   
4. Take part in your employer’s retirement plans. If your company offers one, it is usually the best tool you can use. Talk to a financial professional for all your options.
   
5. Learn about pension plans. If you have an employer or government pension plan, learn all the details.
   
6. Keep your retirement savings off-limits. Don’t make a withdrawal until you retire, you might incur penalties and it will be a setback for realizing your goals.
   
7. Get your employer to start a plan. If your present job doesn’t offer a retirement plan, ask for one to be started. Many times it isn’t a cost to your employer to start one, and it can help you tremendously.
   
8. Learn about your government’s retirement plans. Every country has different plans some with special tax incentives, so learn what your country offers and plan accordingly.
   
9. Do your own research. Use the Internet, read the newspapers and magazines, talk to your friends, to find out as much as you can about retirement. NB Culled from Smarter Lifestyles