Is your pension annuity enough, or do you need to top that annuity up? I have made reasonable provision for my future. It therefore makes depressing reading to learn that the average cost of retirement is £413,000 and if I live to be 100 retirement costs rise to £700,000.
These these latest figures are contained in a report from the prestigious Centre for Economics and Business Research (CEBR) and are not an exaggeration. According to the CEBR, for wealthier individuals, wanting to maintain their standard of living, retirement could cost as much as £1.55 million, while retirement costs a typical couple £413,000, and an individual living alone £326,700.
A retired couple, both over 65 will have personal tax allowances of £9,030 each, plus CGT allowances of £9,600 a year each meaning they can have ‘income’ of up to £18,630 each or £37,260 as a couple, completely tax free. On top of this they can take an unlimited amount of gains taxed at only 18% and if they have invested in Peps and ISAs, a tidy sum in tax free income from these investments too.
For younger people starting to save for retirement today, the outlook is uncertain. You can currently invest up to £7,200 a year in an ISA and unless an employer is contributing to an occupational or group personal pension, it pays to save in the ISA rather than a pension scheme because of the greater flexibility this gives and the fact that you are not forced into buying an annuity.
Look at an example of using Peps and ISAs compared with pension savings. Take two investors who both have £7,000 to invest. One puts it in an ISA, the other puts it in a SIPP or personal pension. If the investors are higher rate tax payers, then the £7,000 put into a pension is immediately equivalent to a grossed up contribution of £11,666.
Assuming that both invest in the same unit trust, and that the value of the investments in both the SIPP and ISA double, the value of their investments will be £23,333 in the SIPP and £14,000 in the ISA. At retirement 25% of the pension can be taken in tax free cash, equivalent to £5,833, but the rest taken as pension is subject to income tax at the investor’s highest rate. Assuming 5% is drawn down from the remaining pension fund of £17,500 income after tax at 40% would be £525 a year.
Meanwhile, the ISA investor can take the full value of the fund, £14,000, tax free at any time. But comparing it with the SIPP investment, if you withdraw 25% or £3,500, then a 5% drawdown from the remaining ISA fund of £10,500 is a tax free £525 – the same as the SIPP.
