The question, from Judy, aged 51
I would really appreciate your help. I have recently become separated after almost 30 yrs of marriage and obviously my retirement plans have changed completely. I work full time as a Nurse but unfortunately only rejoined the NHS pension scheme 5 yrs ago and my pension at 65yrs would barely cover household bills and living expenses. I aim to start saving on a regular basis from March 2015 but do not want to restrict myself too much as need to be able to access money in case of emergencies. I could however spare max £200 a month for pure savings and wondered the best way to safely save/invest this to provide me with the best returns.
The answer, from Alan Dick CFPTM, Forty Two Financial Planning
The NHS final salary pension scheme is a great scheme and you should certainly continue paying into this. You also have the option of paying Additional Voluntary Contributions (AVC) to top up your pension benefits. Any additional contributions will benefit from tax relief at source at either 20% or 40% depending on your own tax situation. You will normally be entitled to apportion of the additional benefits as a tax free lump sum while the remainder will be treated as income and taxed accordingly.
There are generally two distinct types of AVC arrangements. The first provides a guaranteed level of income in retirement in the same way as the main scheme; you simply purchase additional years of service at a pre agreed cost. However, this type of arrangement is becoming increasingly less common and where it is available the cost of extra years can be expensive. The other option allows you to pay contributions into a personal investment pot (usually referred to a money purchase or defined contribution arrangement). In this case you will need to make investment decisions based on your own attitude to investment risk and requirement/desire for future growth.
There is little doubt that pensions are one of, if not the, most tax efficient means of saving for retirement. However, you mentioned that you also need to consider flexibility and access in the case of emergencies. Therefore, the best option for you may involve a combination of your employer’s pension scheme and a NISA.
A NISA is simply a tax privileged investment account. Unlike pensions, NISA do not receive any upfront tax relief but the benefits will be tax free when drawn. Like a money purchase AVC, the fund will grow virtually tax free until you need the money. You can save up to £15,000 per tax year into a NISA so the level of contribution you wish to make would fall within the allowable limits.
Regardless of the tax wrapper (money purchase pension or NISA) you will require to make a decision about the best investment strategy to achieve your goals. This will be guided by personal circumstances and is always a balancing act between chasing higher returns and managing risk of loss. We often describe assets as either defensive or growth. Defensive assets are at the lower risk end of the spectrum and would include cash and fixed interest securities. The returns from defensive investments is likely to be relatively modest. In fact, cash would normally be expected to return less than inflation in the long run so the real value will be falling each year. At the other end of the scale we have growth assets such as shares and share based investment funds (also known as equities), property etc. These should provide the highest long term returns but they can also behave like a roller coaster so you should only consider these for money you are prepared to risk and where you are can handle the ups and downs emotionally. Therefore, the best option is likely to involve a combination of defensive and growth assets. You can either select individual funds or one of the many managed funds that invest in a wide range of different assets to manage overall risk.
Alan Dick CFPTM
Forty Two Financial Planning