Personal Finance Articles
Software & Books
Resources on the Web
- Why bother?
- More people living longer
- Lower birth rate
paying into pension funds
- Today's workers can't rely on state / next generation to support them
in old age.
- How pensions work
- On reaching retirement pension fund is used to buy an annuity
- This pays a monthly sum for the life of the holder
- A cash sum may also be withdrawn from the pension fund before annuity
- Annuity does not have to be bought from company that managed pension
fund shop around
fo best deal
- Types of annuity
- "flat rate" - pension stays same for duration of annuity
(if inflation, actual value of pension falls)
- indexed - pension rises with inflation (pension maintains its
- initial rate of indexed annuity is lower than "flat rate"
- some annuities offer widow's benefits, ie a (possibly reduced)
payment continues to partner should annuity holder pass away.
- Company Pension Schemes
- Where available, generally a good deal
- Employer pays as much as - if not more than - employee
- 2 flavors:
- Individual builds own pension pot
- Final salary scheme - actual pension based on final salary (over
last few years) & length of scheme membrship (regardless of
actual amount paid in)
- often index-linked, pension rises with inflation
- Final salary scheme generally regarded as better deal but now being
phased out by many UK employers.
- Returns on pension funds are compounded (re-invested)
- If you save $100 a month with 5% added at each year end:
- after 20 years you have $41,663
- after 40 years you have $152,208
- invest for twice as long, get 3.65x the funds!
- Effect of compounding
the sooner you start the better.
- Tax breaks
- Most governments offer some form of (often quite generous) tax
incentives for pension savings
- Investments must be held in official pension funds
- Funds may not be withdrawn until fund holder reaches a certain age
(may be some exceptions eg for sportspeople who retire early)
- A long-term investment
- Can afford to be adventurous
- Stockmarket is good core investment either through:
- Low cost market index tracker fund, or
- Individual stocks and shares
- be sure to invest in a broad range of stocks, eg at least
12, across different industry sectors.
- Avoid managed funds - fund managers are deleterious to your wealth
and on avaerage, after fees, fail to beat the market as a whole.
(of course some managers do beat the market
in some years, the problem is it's impossible to tell in advance
which ones they are)
- Diversification into real estate, overseas investments etc is advisable
- Pension funds can also include art & other collectibles - fine
if you have specialist knowledge, otherwise best avoided.
- Equity Release
- For many people largest asset is their home
- Many older people move from (more expensive) larger house to (cheaper)
condominium, thus releasing funds
- Equity release schemes buy all or part of your home
in return for an income for life
- You are allowed to remain in your home (scheme doesn't get its
share until you pass on)
- Negative implications on dependant's inheritance.