Hints and tips for later life pension savers

While the hurdles may be higher for a 50-year-old than a 20-year old, the fundamental principles of saving to fund one's retirement are often the same for older people as for those who start early on in life.

Clients or prospective clients who come looking for advice, therefore, can be given some basic guidelines to follow, which should help them maximise their savings potential, regardless of their age.

Save as much as you can

According to Tom Selby, senior analyst for AJ Bell, the over-arching principle is the same for someone aged 50 as it is for someone aged 20.

He states: "Save as much as you can afford in tax-incentivised products and snap up any free money on offer through your workplace pension."

The old adage - save half your age as a percentage of your income - works in favour of 20-year-olds, who only have to put aside 10 per cent a month.

For 40-year-olds, that rises to 20 per cent and, for 50-year-olds, a 25 per cent contribution from a monthly salary can seem eye-watering, given all the other living expenses people face: the mortgage, school fees, household bills and commuting.

Where circumstances allow, carry forward can be an invaluable tool for boosting a pension in a short space of time. Jessica List

But even if 25 per cent is not feasible, Vince Smith-Hughes, director of specialist business support for Prudential, believes it is possible for people to create a budget that allows them to make the most of whatever pension contribution they can make each month.

He gives an example of a 50-year-old looking to build up a pensions pot of £100,000 by age 67 - the current state retirement age.

This individual could achieve this by saving £376.37 a month gross, assuming a net return of 3 per cent, net of charges at 0.25 per cent. 

Because of the current tax treatment of pension contributions on the way in, this would work out at a total cost of £301.10 net to a basic rate taxpayer, given the 20 per cent tax relief, and £225.85 net to a higher-rate tax payer, given the 40 per cent tax relief.

As Alistair McQueen, head of savings and retirement at Aviva, comments: "Make any additional saving from now on work as hard as possible."

Maximise your workplace pension 

One way of making tax work in the individual's favour is to make the most of a workplace pension scheme. Whether this is a generous defined contribution (DC) scheme, a rare-as-hen's-teeth defined benefit (DB) scheme or a standard auto-enrolment pension, any contributions made are tax exempt on the way in.

This means there is a tax benefit to putting money into a workplace scheme, at either the basic rate or higher rate, depending on the individual's circumstances. 

As a spokesman for Royal London points out: "Even if it is just a modest amount, the government will pay in a bit extra in the form of tax relief. When saving in a pension, the fund also grows tax-free and when deciding to take money out, up to a quarter is normally available tax-free."

Every pound saved in a workplace pension benefits from this tax boost - and should also benefit from an additional contribution from the employer, regardless of age. 

This is why it is always good to "max out on any employer contributions available", the Royal London spokesman adds. 

Andrew Pennie, head of pathways for Intelligent Pensions, goes further: "By not taking up this pension option, you will effectively be giving up free money."

Moreover, there is great flexibility built into defined contribution schemes, says Alistair Wilson, meaning clients can scale back contributions if they are going through a few tight months financially, and put more in when they are "feeling flush". 

The important thing, he says, is to get into a retirement savings habit.

Make the most of tax-incentivised products

For those who are self-employed, or for those who want to save in a workplace scheme and make the most of other savings, there are a range of tax-incentivised savings schemes available.

Some of these can range from the higher-risk, more sophisticated schemes, such as seed enterprise investment schemes (SEIS), all the way through to venture capital trusts (VCTs), to basic stocks and shares Isas.

Each carry their own merits and demerits, depending on the financial situation and suitability of the product for the individual, and certainly the more sophisticated products should be within the purview of the adviser. 

"For people who are self-employed, the onus is very much on them, and them alone," says Mr Pennie. "If not paying tax at the higher rate, the self-employed may wish to consider Isas as well as pension saving."

There are further tax considerations, however, that individuals can benefit from if they want to make the most of their savings potential later on in life.

One of these is the use of the carry forward rules, which enables an individual to make large one-off contributions.

Carry forward allows a person's unused annual allowance (currently at £40,000 a year) from pension input periods ending in the three previous tax years to be carried forward and added to the annual allowance for the current pension input period.

To use carry forward a client will need to have had a self-invested personal pension (Sipp) or other type of pension in place in each of the three years, although they do not need to have made any contributions, or even used all of their £40,000 annual allowance.

Also, their new contribution does not need to be paid into the same pension.

Example: Carry Forward

An example of how this can be used is provided by wealth adviser Tilney.

Let us look at Mr Smith. He is a fictional investor in his 40s with a current salary of £170,000. He has made several pension contributions over the last few years:

In this example, Mr Smith can carry forward £70,000 of unused allowance from the past three tax years.

If Mr Smith were to use his full £30,000 tapered annual allowance for 2018/19, he could contribute £100,000 this year and still receive tax relief.

According to Jessica List, pension technical manager for Curtis Banks: "Where circumstances allow, carry forward can be an invaluable tool for boosting a pension in a short space of time.

"The current annual allowance may be much lower than it was a few years ago, but carry forward allows individuals to make large, one-off contributions and make up for some lost time." 

Mr Selby says the carry forward rules can be particularly useful for self-employed business owners, who may have prioritised investing in their company instead of putting money aside into a pension.

Take account of everything

Before making any big decisions, the most important thing is to sit down and assess the client's current and anticipated financial situations.

How many properties does the client own? How many small pots might they have floating around? What is the value of their total liquid assets? What about their state pension?

Such questions can help start to form a plan and help the clients focus their minds more clearly on the task at hand.

"Before starting to save", says Mr Pennie, "I would encourage people to devise a plan".

He says this should take into consideration everything, including: 

• The state pension forecast.
• When the client plans to retire.
• Any outstanding debt that needs to be cleared.
• What other savings and investments are available?
• How much income the client might need in retirement.
• What will any workplace pension offer?
• What current affordability is available?

Mr Pennie explains: "An understanding of these questions will enable someone to understand what their current pension shortfall is, and how much they would need to contribute in order to achieve their plan."

Ms List agrees: "[They should] obtain a state pension forecast, to get an accurate idea of state pension income, and certainty around the age at which it will be paid."

While this plan may present some stark realities - such as the prospect of the individual having to remain in work far longer than they had originally expected to, or to reduce their expectations of living in luxury in retirement - this is better to know at age 45 or 50 than age 65.

Get advice

Employing the services of a financial adviser is a strong starting point for people who can afford it.

Mr Selby adds: "Those who can afford to should engage the services of a good financial adviser to set out a realistic plan aimed at achieving whatever retirement goals they may have."

There are also free guidance services available to point the casual enquirer towards, such as Pension Wise, the Money Advice Service or The Pensions Advisory Service, as well as free-to-use pension calculators that can give people an idea of how much they might need to save if they intend to retire at a certain age. 

These tools can all help them start thinking more clearly about their goals and their financial priorities. 

It's always an option... 

Then there is always remarriage. In January, a study from Investec Wealth & Investment found 48 per cent of divorced and widowed women aged 55 and over said their financial wellbeing would influence or has influenced their decision to remarry.

"Money alone doesn't guarantee a successful marriage, but whether we like it or not it's a key factor, and that is well-recognised by those women who have already tied the knot," says Helen Medhurst-Jackson, financial planning director at Investec Wealth & Investment.

It may not be quite the answer Waspi women are waiting for but it seems to have worked for some people. 

simoney.kyriakou@ft.com