Stakeholder Pension - Benefit and need of investing for your retirementWhether it’s only a few years away or still over the horizon, your retirement needs careful planning. If you do not have your own pension you’ll have to rely solely on the State and your own savings to support you. To enjoy a comfortable retirement you will probably need a yearly income of at least 2/3rds of your salary at retirement. So if you leave it too late to review your pension arrangements, you may not be able to enjoy the retirement you want.
Stakeholder Pensions
A Stakeholder Pension is a personal pension.
On 6th April 2001, the Government introduced stakeholder pensions to provide a low cost pension, designed to encourage more people to invest for their retirement.
With the real value of the State pension decreasing each year, when measured against the average rise in earnings, it’s unlikely that the State pension will provide you with enough income to enjoy the lifestyle you want in your retirement. The Government recognizes there is a problem and this is why the Stakeholder Pension has been introduced.
ISAs
ISA stands for Individual Savings Account. These were launched in April 1999 by the Government to encourage investment. The aim is to help the value of your money to grow over time and/or provide an income.
There are two types of ISA. You can have one maxi ISA or up to two mini ISAs of different components each tax year. A tax year runs from 6th April one year to 5th April the following year.
The table below sets out the maximum current amounts (until April 2008) you can pay into ISAs each tax year.
| Component | Mini ISA | Maxi ISA |
|---|---|---|
| Cash | Up to £3,000 | Up to £3,000 |
| Stocks and shares | Up to £4,000 | Up to £7,000 |
| Overall limit | £7,000 | £7,000 |
Note: You can only invest a maximum of £7,000 in ISAs each tax year.
You can’t take out a mini ISA and a maxi ISA in the same tax year. If you do this, you will only get the tax advantages on the first ISA you take out in that tax year and the second will have to be closed.
Difference between investing and saving
While both investing and saving aim to improve your financial well being, investing is more about aiming to accumulate money over the long term, to provide you with some future financial security. Saving, on the other hand, generally means putting money aside for the shorter term, which could be to help pay for a holiday, a special occasion, a child’s education and so on.
In a savings account your money is secure, generally accessible and gives greater certainty about growth. But in exchange for this security, you will normally only receive a modest return which reflects the current rates of interest available which may seem quite low.
Investing, on the other hand, has the potential to bring bigger rewards over the longer term as many investments are linked to the movement of the stock market, which can provide a much greater return than you could expect from a bank or building society savings account. However, because the value of stocks and shares will go down as well as up, it also carries a greater risk and you may not get the returns you expect. Unlike a bank or building society savings account your capital is not secure and you may get back less money than you originally invested. (See Risks of investing below).
Different ways to invest
You can either invest as an individual, buying shares, bonds and property or you can invest in a pooled investment, which is the easiest option for most people. A pooled investment is where your money is pooled with that of other investors in order to buy a large portfolio of assets, which is then professionally managed, an example of which is a stocks and shares ISA. Pooled investments have the advantage of enabling you to spread risk, although the value of investments can go down as well as up and you may get back less than you invested.
Investing for income and investing for growth
Some people, for example those who are thinking of retirement or who are no longer earning a regular salary, choose to invest their capital to get a regular income. Others invest in order to accumulate a lump sum that they can then use to cover major expenditure in the future, such as their children’s education, family weddings or a holiday home to escape to.
Shares and bonds
When you buy shares on a stock market, also known as equities, you are buying a stake in a publicly listed company. When a company offers its shares for sale to the public they effectively ‘float’ on the stock market. Generally, when the value of a company rises, your shares in the company are worth more and if it falls so does the price of your shares. Past performance is not a guide to future performance.
Governments or companies issue bonds in order to raise money. When you buy them you get a guaranteed rate of interest over a fixed period, plus the price per bond, which is agreed at outset, at the end of the term. While they are generally regarded as lower risk investments than equities, the level of risk obviously depends on the market conditions and the stability and economic performance of the bond issuer. Bonds are often traded on the market, as investors look for the best available rates of interest for their money. The downside is that you may get back less than you invested.
The stock market and the FTSE 100 Index
The term ’stock market’ refers to the marketplace where investments generally are bought and sold. An index is a smaller selection of companies that you can look at to get an idea about the market’s movements. The best known of these in the UK, the FTSE 100 Index, is made up of the 100 largest companies on the London Stock Exchange.
Investing a lump sum or regular payments
It depends what you are able or prefer to do. If you invest a lump sum, you get immediate benefit from the large amount if the market rises - and immediate losses if it falls.
A regular payment plan, on the other hand, enables you to build up your investment portfolio gradually, while keeping your payments at a level you are happy with. It also has the effect of helping to even out the daily ups and downs of the value of your investment.
If you can afford to put your money aside for longer periods, say five years or more, investing offers greater potential for your money to grow. Most investments are stock market based and over the long term have the potential to earn more than a bank or building society savings account. Savings accounts offer security of capital, are generally more accessible and give greater certainty of growth. But historically, they have not achieved the same level of growth as investing in the stock market, although past performance is not a guide to future performance.
Length of Investment
Of course you can invest your money for as long as you want, but there are a few points you need to bear in mind. Short-term investment in the hope of making big gains quickly is risky. You should be thinking in terms of an investment period of at least five years. And the longer you leave your investment, the more likely you are to see a return, but the downside is that you may get back less than you invested.
Risks of Investing
When you invest in shares, you accept a risk to your capital in exchange for potentially higher returns - and what is acceptable to one person may be sheer recklessness to another. But if you prefer not to take risks with your hard-earned savings, there are a number of ways you can reduce that risk.
For example, the more companies you invest in, the more you spread the risk. If you were to invest equally in shares in four companies and one of them did particularly badly, that would adversely affect 25% of your money. If, on the other hand, you had invested in a fund that covered 100 companies equally, the poor performer would only affect 1% of your investment. Conversely, investing in a smaller number of companies means you benefit more when they do well and if you invest in a large number of companies you don’t benefit as much.
Likewise, by limiting your investment to a single industry sector, say telecommunications, or geographical region, say the Far East, your returns will grow quickly when those areas are booming, but will also feel the negative effects of any economic downturn more quickly. Variations in exchange rates will also have an impact on the returns on your investment.
You can also place some of your money in funds that invest in cash, corporate bonds and property to add balance to your portfolio.
Sensible investing is all about setting the amount of risk you are prepared to accept.
Choosing the right investment for you
This depends on a number of factors, including your attitude to risk, how much access to your money you want to have, the length of time you want to invest over and so on.
Deciding which products are right for you
Your choice depends on what you want to achieve. For example, if you’re aiming for your money to grow over time, you might choose to invest in a UK FTSE 100 Index Tracking Fund, which aims to match the performance of the FTSE 100 Index as closely as it can, subject to changes. But of course the value of this type of investment can, like the FTSE 100 Index, go down as well as up and you may get back less than you invested.
If you are looking for retirement income, you could opt for a Stakeholder Pension and build up a portfolio by selecting funds that cover companies in different countries and industry sectors; or by balancing different types of investment such as shares, gilts and fixed interest.
Please note: If you would like advice you should see an independent financial adviser, who may charge for any advice.
