Lorna Bourke: my top 10 tips for saving for your retirement

"today’s level of around 4,400"........really..... And i thought that it was nearer 5,400? If we are to follow & learn from these articles, we do need to feel that they are accurate. Not a moan, just an observation.

I think the artical is severely undermining the value of pensions as a savings tool.

A pension is solely for retirement savings that people cannot dip into before they are 55. With a large ISA holding, of course many people are going to dip into this for holidays, home improvements, car purchases etc.

In an ideal world where people could earmark pots of money and be disciplined to leave it in that pot, perhaps pensions would have little relevence - but this is just not the case.

Oh... and also 20% tax relief at source for all contributions. Quite a valuable benefit especially if this is going to be invested for 20 years or more. Even more so for higher rate tax payers.

A combination of savings vehicles would be useful to the average investor.

If dividens are reinvested then FTSE is closer to showing a gain. Its about quality of selection eg Invesco pep Income shows a gain over the period I believe

K S - well done for spotting our 'deliberate mistake'. An innocent typo I assure you! Now corrected

Thanks, Rich

Facile to the point of irresponsibility.

At last - a financial journo who is prepared to expose the con-trick of saving in a pension. I have been banging on about this for as long as I care to remember and get continually berated! Until that is I prepare a spreadsheet for sceptics showing them exactly why they are being robbed by annuities!!

Oh, and I used to be a trustee of my employer's pension fund! Unless you are a 40% tax payer and your employer is at least matching your own contributions, do NOT get sucked into this pension con-trick. DO however, contribute as much as you can afford into your (and your spouses) ISA every year. You will be surprised just how quickly you will build a decent sum.

Long after you have departed this world, your off-spring will also benefit from the capital sum left in your ISA, which would be stolen by annuity providers on your demise should you have been foolish enough to buy an annuity.

The big problem with personal pensions is Annuity rates, which can only go down in the future. This cancels out any government top-ups which can also change in the future.

ISA's beat them every time if you have the will-power not to touch threm

A really poor introduction to an article that purports to help !

For 1 when i buy food i know they are not selling me it to stop me starving but to make a profit. So, should i not buy food?

2. When you pay into a pension you are unlikely to have paid 1 contribution into a ftse 100 index in December 1999 ! You pay every month and if you start in your 20's and 30's you pay for 30 + years. If you pick Dec 1979 does your argument still hold?

I agree about saving through ISA's rather than a pension. But thats because im older and less inclined to dip into the ISA not sure I would have had the will power when younger. So delighted to have both. The rules will change and I wouldnt be surprised to see eventually sipps/isa become one and the same.

So I would advocate pension saving when younger and isa's after.

As a retired man - who did not do well out of the pensions racket due to enforced job moves - I fully support Nigel Meek. While you may receive a 20% tax rebate as a standerd rate tax payer you must set against this the charges/costs imposed by the pension fund managers. One then has to purchase an annuity - look what has happened to annuity rates in the past few years. Income draw down is only really an option for those with a pension pot of £100K or more. I managed to save/invest money mainly in shares, this was contrary to advice received from professional advers 25 years ago! That has meant I can live modestly biut comfortably, at least the funds are under my control. Pension funds are perhaps an option for the higher rate tax payer.

With the best part of 20 years to go before I retire, I'm very much hoping the annuity swindle will have been abolished before I get there.

Nice to see a mention of investing in PIBS - though they aren't 100% safe so diversify within this type of investment. If you're looking at these also look at preference shares issued by banks - research NWBD or LLPC for example. Collins Stewart produces a weekly list of prices of all these fixed income instruments.

With a large number of equities still grossly undervalued self-select share ISA's offer an attractive means of building a useful some of money to top up a pension. Depending on age one could start by going for a mix ture of high growth potential and quality high yielders. As the pot grows and time progresses gradually move more into the higher yield options.. Alternatively buy the best classic car you can afford and drive your pension pot on sunny weekends and holidays.

Lorna - Being a pensions lawyer, I entirely agree with you about the tax-efficiency of pensions and their drawbacks compared to ISAs.

Where we differ is on your attitude to risk. The greatest risk in retirement savings is not to have enough to support yourself to your chosen standard of living. Investing in "safe" investments like bond funds is, from that point of view, far more risky than investing in so-called "risky" investments.

For me, bond funds are a complete no-no, and I far prefer Far East investment trusts - for example, Aberdeen New Dawn or Edinburgh Dragon, which have beaten the FTSE All-Share over 1, 3 and 5 years every month for the 4 years I've been monitoring them.

If your investments yield 20%, you double your money every 5 years.

You are absolutely right about having to manage your investments actively, though I still didn't see the last recession coming!

This report has massively simplified the retirement question and plays on people's view that only higher rate tax payers benefit from a pension

1) Annuity rates aren’t doomed to go down; if GILT yields improve (which they do sometimes) they will go up

2) Young people are not disciplined enough not to touch ISA holdings over the long term, it’s not a weakness it’s just the fact that life will throw things at you that suddenly take a present need (e.g. babies). I am glad I cannot touch my pension until I am 55, as otherwise I'd be down the boozer with it, and so would the rest of my demographic.

3) Annuities are not the only option, if somebody has saved all their working lives as they should into a personal then they could take a less secure income with some or all of their savings, income drawdown (for just one instanced) could be entered into in the early years until the retired is at an age where annuities look like a more sustainable deal. There are also With Profit annuities and other 3rd options which people should look into at retirement, in this day and age of hypochondria epidemics, many of us can get enhanced annuities.

ISAs are a good savings product and should be used to save funds alongside pensions in order to get the best of all three short/medium/long term requirements (i.e. emergency fund (cash ISA) / Savings vehicle for kids uni fees etc (S&S ISA), ensuring you have a STABLE income in retirement.

Nobody has mentioned this. Let me know if I am barking up the wrong tree!

Would it not be benefit for the younger members of us that have not yet hit the 40% tax bracket to save in a stocks and shares type ISA for the next say 5 years (I am only 30) until your salary is in the higher 40% bracket. Once you are paying the 40% then put it in the pension and get the 40% tax relief as well getting the tax relief while investing it in the money in the stocks and shares ISA. By then I would only be 35 and probably still have 25 years minumum of pension investment aswell.

By the way I am paying into a pension where my employer is contributing as well.

The above seems away of maximising ISA's and tax relief. I am pretty disciplined with my money but dont think I could manage not to dip into the ISA pot over the next 30 years.

A very good article Lorna

After 40 years of been self employed, I now can confirm that most of my with profit pension plans, that were supposed to make me a millionaire by the time I wanted to retired, have turned out to be a load of expensive rubbish.

I did open a SIPP and bought utility shares when Maggie sold them off and I have enjoyed watching them perform and reinvesting the proceeds but the charges keep going up

I also bought property to rent out and this has preformed very well but you if you are in the cheap end of the market you can have lots of tenant problems.

The best bit of advise my accountant gave me was to keep moving up the property ladder with your own home, buy as big and preferably with land as you can afford but the trouble is you have to downsize to the profit

I thought that funds invested in a Pension Fund attracted a 25% tax 'gift', i.e. for every 80p paid in the taxman adds 20p. Fund managers may take an annual 1.5% and a bid/offer spread will also apply (as with any stock market investment) of between 3-5% depending on the fund and manager.

With pound/cost averaging on a monthly basis a good fund should easily deliver strong returns.

Buying your own home at the right price has always been a good idea. Maybe also, if you can afford it, a 2nd one.

You dont pay bid offer spreads on pension funds and the amc is a max of 1.5% but you may pay more for externally managed funds. You get tax relief on contributions at the highest rate that you pay it, 20 or 40%. Ok you pay tax the other end but less and you get the growth on that money... hopefully.

The world is full of people who advise on the basis of their own personal experience but its irresponsible to tell people not to save for retirement because of your own hard luck story. In the end you should save money so that you have some! Whoever thought they would necessarily become millionaires by saving into any investment vehicle is incredibly naive.

Not so, Mr O'Brien - it depends when you start and how well you monitor the investments.

My second cousin, who was a college lecturer, had a disabled son. Realising he needed to put aside some money for his son's care, he invested all his spare cash from the mid-1960s in equities. The son died in 1993, leaving his parents with a "pot" of £1.3 million. Unfortunately there's a limit to the number of Ferraris you want when you're 87 . . . .

The tax-man appreciated the Inheritance Tax, though.

Well said Lorna ! I am well into retirement (10 years) and was given some brilliant advice well before I retired, which was simply to back both horses, half our savings each year into ISA/PEPs and half into a personal pension plan into which my employer contributed. Now we have an income stream, half from ISA funds and half from a SIPP draw-down. We were always concerned about the threat of having to take annuities at 75, but hopefully we shall have soon confirmation that it may not be necessary . At present annuity rates are dismal and could remain so for some time. As someone has already said they are a rip off.

i think that was kinda my point Mr May

buy some property , sit on it for 30 years. Then sell it or remortgage it. Pension sorted.

Whilst I would agree that saving in ISA's rather than a pension would generally be more desirable, due to the additional control one has over their funds, no-one seems to have considered what would happen should they be unable to work, for whatever reason e.g. illness, age, lack of skills etc.

In this scenario, pensions are ring-fenced, but ISA's are not. It could well be that any ISA savings are swallowed up by living costs, before any benefits can be claimed.

I've now read 2 or 3 articles by this journalist and frankly I'm bewildered at what she's allowed (and presuambly paid) to publish. Apologies if I repeat previous points by other posters:

1. "the ability to take tax free income at retirement from an ISA is as valuable as tax relief on pension contributions."

This is dangerously misguided advice. Pensions are significantly more tax-efficient than ISAs even for basic rate tax payers, not only because of the 25% tax free lump sum, but because everyone has a personal allowance in retirement (£9.5k for over 65s) which will in many cases be greater than someone's total retirement income, meaning that all pension income would be tax-free; this contrasts with ISAs where all investments have been taxed;

2. It is not necessarily a good thing to retain complete access to money intended for one's retirement, and a pension protects against a lack of willpower;

3. Pensions and ISAs are just "wrappers" - shares, funds, bonds, and cash investments can be held within either of them, and it is more likely to be the type of investment which determines the level of charges, rather than whether a pension or ISA is used to invest;

4. Average UK stockmarket returns since 1900 have beaten cash and bond returns by a factor of 4 or 5. The stockmarket has beaten cash in virtually every 20-year period in the last 100 years. In addition, making regular investments means that periods of decline are smoothed out (pound cost averaging), so the example of a £100k investment held from 2000 to 2010 is facile. If you're in your 20's or 30's and not investing your pension in equities (and emerging market equities especially) then you're on a road to nowhere.

5. Annuities are not necessarily a bad thing, they're just another factor to consider when making risk/reward decisions. If you want a guaranteed income for life then they provide it. If you want to manage your own pension fund and take income drawdown then do that instead. If your pension fund isn't large enough to enable you to do that, then having your money in an ISA isn't going to suddenly solve all your problems.

Please, please, please, Lorna, stop writing this stuff.

At A Whitehead, I', with you all the way and congrats (if with a little jealously) on putting the argument forward in abetter way than I could. I find that Lorna's pension commentaries stink of prejudices and such broad sweeping statements as '90% of people are better off without a pension' is damaging to the retirement planning industry and is consequently bad for the economy, however, she gets alot of responses for such articles and so I can't see her stopping anytime soon!

Looks like the sales people who sold me my pensions are still alive and kicking, I am only pleased I had the sense not to rely on their false promises or I would be right in the doo daa

Rick Sure, care to elaborate?

Nobody should have promised to make you a millionaire (and frankly I very much doubt they did) I'd like to know exactly what promises you were given? I've read your previous post and it sounds like your investments were focussed towards With Profits (an asset class dating back over 200 years, within which time I believe you are the only person to associate the investment with making anybody a 'millionaire'). If somebody actually PROMISED YOU performance growth on a fund such as with profits which can suffer from TB reductions and MVR, then you have grounds for a complaint, why don't you write a letter to FOS? it won't cost you anything and you can perhaps gain reperations from your tormentours. Nobody should give anybody promises with regards to speculative assets.

Sorry before you say it, yes With Profit funds probably have made millions for the provider through managment charges. However, so what this is business and nobody (especially fund managers) work for free!

This has got to be one of the best discussions/comments article on Citywire this year. So many good points raised in the replies and it shows that there is no one path to financial contentment in retirement that suits everyone.

It really is a shame when article writers paint a gloomy picture of the last decade concerning a single investment in the FTSE with no mention of dividends being re-invested or monthly drip feeding of contributions as happens with pensions.

I am not a great fan of pensions but they have their place and I was happy enough to join one when my employer was making larger contributions than mine, and further help from the tax relief helped. I am now in a situation where I will have to pay taxes on my company pension alone so am glad I kept up my ISA and Unit Trust monthly investments.

Mr Whitehead's comments are so sensible, he should be writing important articles like this instead for Citywire. I have had some good results by switching in and out of various asset classes over the last 12 years including learning to short shares via the use of CFD's. It was not something I could have done by being a passive investor (buy & hold) but a few hours a week swotting up on finance articles and learning to study chart analysis patterns paid for itself many times over.

It would be good to see some sort of financial education in schools for all pupils in maybe their last year or two. If it turned people away from living on credit to starting to save and invest from an earlier age maybe we could have less people facing a poor retirement.

Shame on you Mr Meek you used to be a pension scheme trustee and yet you think that company pensions are the preserve of higher rate tax payers! so lower rate tax payers who get their contribution dobled by their employer shouldnt join??

Its this sort of chinese whisper advice that really annoys me !

Anon 2, I quite agree with you, I finished school within the last decade and at that time Social education and religious education (as two seperate subjects!) where on he compulsory syllabus, there is (or at least waaaay back then) absolutely nothing being offered to help the next generation be more financially astute! We could be a far more prudent nation if basic economics and financial sense were incorporated into the classroom.

Rick, I work for a travel agent and definitely have no interest in the pensions industry; nor do I have much knowledge of endowments or with profits pensions. I'm simply extolling the virtues of pensions as a tax-efficient way of investing. As I said above, an individual's choice to invest in cash, shares or funds is exactly the same in a pension "wrapper" as it would be in an ISA. The advantage is that a pension attracts immediate 20% tax relief, and for many people will generate a tax-free income in retirement because of personal allowances and 25% tax free lump sum.

As a higher rate taxpayer, it's not even a marginal decision for me as 40% tax relief is a no-brainer when it comes to me investing in a pension; however I wouldn't want others to be mislead - even non-taxpayers can get tax relief on some pension contributions, so it affects everyone.

Dear Mr May,

If your investments yield 20% pa they double in just under 4 years NOT 5.

Paul -

You're absolutely right - even better!

Nobody seems to have mentioned investing in a SIPP for a child. Now my daughter has left university and (in theory) supporting herself, I am paying her monthly allowance into a SIPP. She gets the tax relief paid back in, I choose the investments, and she can't touch it till she gets to 55 (or whatever age it'll be by then). I've been told that every £10 invested between the ages of 20 and 30 is equivalent to £100 invested between 50 and 60. Most people in their 20s are scraping to afford rent (not even mortgages) and paying off student loans. A pension is the last thing they think of.

On a brokers recommendation I "invested" £22,500.00 from 1987 to 1998 in a Scottish Widows personal pension plan ( M X fund with profits), so I was surprised when I received an illustration in August 2008 that claims its transfer value to be £20129.46 or if I stay with them I can look forward to a pension of £3830 per year. I am awaiting a new forecast as my birthday is January but from what I had read lately it looks like I should have taken the offer last year. I also have a Virgin tracker that is only worth what I paid in ten years ago

Rick im sure your quite rightly furious. Your example highlights the need to keep up to date with our investments, and not be afraid to switch if we feel we are not getting a suitable return. Im not being holier than thou but why didnt you? My friends never bother and I feel some may leave it too late

Roger May what a star. I am amazed at the amount of people who dont know this. Start a pension on day one of a childs birth and the 60yrs accumulation will be i think the best investment for ones offsprings.

Hi Michael, the trouble is you dont know what you are going to get with a "with profits policiys" until you claim and just as it was with the selling of endowment mortgages the sales people were allowed to claim totally unreliasest figuges with the authroughtis bessin , compounded interest rates at 17.5 % was the norm even on a writen forecast with a nod and wink from the the salesman that that was the low side.

I was dianosined with having a weak heart when I was about nine and have resently been told that I am lucky to have made it this far but when I mentioned this to the sales people I was told it was even more important that I made provision for the family that I much later went on to have

Personally I would not trust a finachal adviser as far as I could throwone until the Finalshal services put the surviving ones against the wall and shot them along with the cotrolling athouritity personal

opps I posted th draft, try again

Hi Michael, the trouble is you don't know what you are going to get with a "with profits policy" until you claim and just as it was with the selling of the endowment mortgages the sales people in that era were allowed to claim totally unrealistic figures with the authority's blessing , compounded interest rates at 17.5 % was the norm even on a written forecast with a nod and wink from the salesman that it was the low side.

I was diagnosed with having a weak heart when I was about nine and have recently been told that I am lucky to have made it this far but when I mentioned this to the sales people forty years ago I was told it was even more important that I made provision for the family that I much later went on to have

Personally I would not trust a financial adviser as far as I could throw one, until the financial services put the still surviving sales personal and their spawn up against the wall and shoot them along with the surviving members of controlling authority's along with the board of SW and similar companies, only saying

p

Thanks Lorna for giving us all an opportunity to debate the difference between financial journalism and professional guidance.

For the record I agree with most of your points, albeit that perhaps I focus on identifying ways to obtain extra performance without increasing risk. Your top 10 should also include ways to participate in the 'value chain' rather than simply buying at the end of it (see example below).

Pensions alone will not address income replacement at retirement - FACT.

Neither will ISA's. Nor just a basket of high yielding direct shares.

Property has delivered the highest, most consistent returns, but it too will not be the answer standalone, just ask all those BTL investors who purchased off plan 3 years ago in 'regeneration' areas. Buying property at the end of the value chain and leveraging is no sure fire win and don't let anyone else tell you differently.

However, combine all of these, maximising tax incentives along the way as soon as possible and we think it is possible to create a half decent retirement strategy.

The problem is most people just have no idea how to maximise standard tax incentives these days or utilise their pension assets effectively to help create additional wealth safely.

Let me give you an example of how to trap natural geared returns (ie no increased risk premium) of 2.5x your initial investment. No investment manager or fund specialist will ever dare bring this to your attention or indeed few property 'gurus' who want to charge PE costed BMV models in the BTL space.

The answer is quite simply buy a plot of Land with full or outline planning consent and renew the license every 3-5 years at a nominal cost until your finances are sound enough to complete the build. In the UK the maximum this should cost you is 40% of the completed property value. By default you automatically lock in the house price index today assuming you complete the build at some point. Hence you have captured 100% of the property market today but with only 40% of the participation cost ie 2.5x geared result day 1. Yes you then borrow another 40% to complete the build, but sell on completion so typically factor in a further 2% explicit cost to cover sales and interest payments and you lock in growth at the higher rate for a cost approaching circa 45% of the day 1 market value.

I then overlay this with Pensions tax relief. Even with basic rate tax relief this increases the natural gearing to over 3x the initial investment.

Factor in 40% tax relief and the number jumps to over 4x ie your net participation cost drops to just 24%. All this is without taking any excessive leveraged risk and it is safer than buying your own main residence since at completion 20% profit is created through VAT savings. Then sit back and wait for house price inflation.

Now I am no rocket scientist, but in order for direct shares, collectives or ISA's to compete with this they have to achieve over 250% growth before you start overlaying the question of whether you should be in ISA's, Direct Equities or Bonds!

Simply apply basic rate tax relief and you need over 300% and with higher rate tax it jumps to over 400%.

So for me the Pension v ISA debate is not so clear cut - financial journalists often miss key points - for example, basic rate tax payers can enjoy tax relief worth over 40% going in through salary exchange/ sacrifice and pay nothing coming out because in all probablility a basic rate tax payer will have limited ability to build up a major income significantly beyond the tax thresholds in a pension.

Another point is that you can reduce your pension charges with tax relief, which any financial journalist should take care to point out, especially when it is reported that over 20 years 25% or more of your potential fund profit is taken away by charges. With basic tax planning advice you could reduce the effects of charges by up to 50% utilising salary exchange.

Pensions have been rubbish, but they typically invest in the same underlying assets as ISA's, which have equally been dissapointing over the same period.

The point is this - all three strategies are required to achieve the ultimate efficient retirement plan and it's absolutely critical that you deal with a professional advisor who shows you how to create increased wealth safely by finding ways for you tap into the 'value chain' as early as possible.

It's just a shame that so few advisors have managed to widen their horizons and focus more on finding ways to utilise pension assets and understand HMRC practice notes.

I wonder if Lorna had been aware that her pension assets could have helped her take a step up the property ladder whether this could have made her top 10? I've not met an advisor yet who has disagreed once I've explained how it's done, but then again I've also not met a pension 'specialist' who knew it was possible either. In fact most pension specialists think it's not possible to invest in residential property schemes that do BTL professionally - but that too has been around since 2006!

If anyone's interested in myth busting pensions or learning how to utilise their pension assets in more interesting ways, drop Lorna a quick message.

:)

As an 86 year old pentioner shares are for me. I have invested for 50 years.

Discipline is required. Reinvest all your dividends. I still reinvest most of mine.

Ignore the siren call of bonds. Ignore the mantra 100 minus your age into equities and the remainder in bonds.Use your Isa.

This may seem self satisfied and smug but it is the way forward.

There are still bargains out there both in UK and far east.

86 year olds investing in shares! ive seen it all now!!!!

This is the most irresponsible financial article I have ever had the misforture to read.

Can someone please shout and repeatly shot eggs and baskets at the author.

Are pensions ideal no. Are ISA ideal no. So do both to get tax relief on the way in and tax relief on the way out. They both use the same underlying investments so a poor investment is poor regardless of the wrapper.

Corporate Bonds and High Yielding Equities - ooops I bought BP shares... Again no explanation about spreading the risk.

Shop around and review regularly - OMG, some good advice.

Annuity are a rip off and waste of money - horses for courses. Some people want a guaranteed income and for them, an annuity is risk free.

Invest in property - now her spots are showing. Leverage, maintainence, cost of ownership....All reduce the income and gains.

We all need to be much more responsible about saving if we don’t want to die in poverty - another great point.

So 2 out of 10. A fail Lorna Bourke.

2 out of 10 for spelling Jason - and you are not the worst!

Keep up the good work Lorna.