Tag Archives: savings

Putting pensions in perspective for editors

It can be hard to know where to start with pensions, especially if you don’t have an employer to make some of the decisions for you. John Firth takes us through some pension essentials.

Pensions are a fairly simple idea (saving for the future) surrounded by baffling T&Cs. You don’t need to learn the detail so long as you clearly separate:

  • short-term needs and long-term saving
  • risk you can live with and risk to protect against
  • costs and benefits (protection costs but provides a benefit)
  • what advisers can offer and what you must do yourself.

I say a little about growth over time. Finally, when you want to draw on your savings you have options.

Most of this article comes down to ‘what do you want?’, ‘that all depends’ and ‘don’t let the perfect be the enemy of the good’: rather like editing.

Saving is Good, and we Ought to Do It, but first, we must put food on the table and then some bills we must pay because, if we don’t, we could lose our home. Not everybody can save.

This article is focused on the UK; pension options and legislation will be different in other countries.

Short term and long term

If you can manage to put money aside, first plan for the short term (today, tomorrow, next week). The best way is to put money aside regularly (out of every invoice paid, say), but a good second-best is to put something aside today, no matter how small. Doing nothing till you can afford to save regularly is a bad idea: rainy days come, whether you’re ready or not.

That money needs to be somewhere easily accessible. Find a bank deposit or building society account paying some interest; some people keep a cushion in such an account, and the rest in vehicles that earn a bit more, but can’t be drawn on so easily: different kinds of ISA, say. How many balls are you happy to juggle at once?

The National Insurance pension gets a lot of undeserved criticism. You would struggle to live on your state pension alone, but it’s the cheapest way to make a real difference to your standard of living in retirement, because

  • it’s guaranteed, no matter what the markets do between now and when you retire, and
  • it’s inflation-proofed.

If there’s a gap in your NI record you can pay voluntary contributions to fill it (check at gov.uk/check-state-pension). I think doing that is more important than making private pension savings.

So, you’ve planned for the short term and made sure you’ll get the full state pension. Now you can start to think about the long term. Pensions offer tax relief on what you put in (the government pays roughly 20% of your contributions to your pension provider, more if you pay higher-rate tax); also, tax breaks on the interest or investment growth you earn. But once you are in a pension, it is difficult and expensive to pull your money out until you retire: so think about whether you can afford to lock money away.

What’s next?

If you can afford a private pension, think about risk. Would it worry you if your pot’s value went down this year? Decide your ‘risk appetite’, on a scale from 1 (‘it would keep me up at night’) to 10 (‘not at all’). What about timing? While you’re younger you might be happy to wait out a slump; however, you probably want to protect your savings if you plan to retire next year, and after you’ve started to live on them. A good adviser will suggest when one investment approach is likely to suit you better than another, and many fund managers offer investment switching options. Some packaged products offer ‘lifestyling’ (higher-risk investments when you’re young; safer ones after 50 or 55): the government’s NEST scheme, for example.

If a slump comes, don’t stop saving! If you think the market’s overvalued, don’t stop saving! The times you bought when investments were cheap will compensate for the times when you had to pay more for them. This ‘pound-cost averaging’ will save you money; moreover, would you be able to spot ‘the right moment to invest’? Consistently, over 20 or 30 years?

Next, when could you retire? If your family all live to be 100, you need to save for as long as possible; if your genes are not so kind, you might want to retire sooner. It all depends …

Hidden and visible costs

Remember risk? Investment guarantees are often provided by ‘smoothing’ returns: the investment manager holds on to some growth in good times, to protect the fund in bad times. You will pay something for this protection, but that cost is hidden.

Index or ‘tracker’ funds aim to ‘track’ a particular investment index, more or less (some funds ‘track’ closely, others within a band above and below the index). These offer some protection – you never get significantly less than the market average – at some cost – you never get significantly more, either.

You could invest ‘actively’, in stocks, shares and other things that can be valued. These go up and down, and your fund manager tries to limit risk by spreading across different types of investment. There are many kinds of specialised fund, including ‘ethical’ funds. Active investment managers usually state costs clearly: often they make separate charges for managing the fund and for new investments, and specialised funds may charge more.

You could do all the investment yourself: many providers market ‘self-investment personal pensions’ (SIPPs).

It’s good to know what you’re paying, but don’t let the tail wag the dog. If ‘active’ investments would keep you awake at night, they probably aren’t right for you; simply accept that you may have to pay a bit more for a safer approach.

Advisers

Advisers charge for their services, some by billing you, some by collecting from your fund’s manager. A good adviser will help you make all the decisions we’ve talked about, tell you whether you’re on track or need to pay more (in an annual report) and help you when you retire. You can expect high costs when everything’s being set up and when you start to draw your benefits, and lower costs in between. Some advisers offer ‘smoothed’ charges, which will probably cost more overall (because they gave you credit during the setting-up, and anticipate costs when you retire).

Most of us should find a good adviser and trust them, but ask lots of questions. The Financial Conduct Authority offers guidance on finding advisers and what to ask (fca.org.uk/consumers/finding-adviser), and a register that you can search for firms qualified to offer advice on pensions (register.fca.org.uk/s/); Unbiased.co.uk is also quite good. Ask friends and colleagues who they trust, and who they don’t – and why.

Doing the maths

Recently, you might have earned 30% in some years, and lost 15% in bad ones. Over time, the good and bad years average out. What matters is outpacing inflation. If your pot grows (on average) by 7% while inflation (on average) is 2%, you’re earning 5% in real terms (7 – 2 = 5). But future charges are probably going to average somewhere between 1% and 2% a year, so your net return may be 3% or 4%. A simple spreadsheet model focusing on the net return is a good way to work out how your savings might grow in real terms.

You should be able to earn a net 4% a year over shortish periods (five or ten years), but there will be bad years and could be bad decades (remember the 1970s?). Over longer periods you’re safer assuming low net returns (2% a year, say). You won’t mind if you do better than budgeted; although, budgeting for 4% and actually getting 2% would mean a big shortfall.

Drawing your savings

Retirement is more flexible than it used to be. You can start to draw benefits from 55 (that will shortly increase to 57), or you can wait: there is no upper age limit. You can even draw some benefits and carry on contributing, but then a tighter ‘annual allowance’ will limit what you can contribute.

Up to one-quarter of your pot can be drawn in cash, tax-free; in stages, if you like (the one-quarter limit applies to whatever is left, so if your pot grows, so will the cash you can draw tax-free).

You can draw the remaining three-quarters in cash, and if your pot is very small, this would be tax-free; however, above this ‘triviality’ limit, HMRC charges a special tax rate to claw back the tax relief you received.

So, most people will use that three-quarters to provide an income, which will be subject to income tax. If you make the necessary arrangements before you retire, you won’t need to buy an annuity with this money: you could leave it invested and ‘draw it down’ (monthly or whenever). Annuities (insurance policies that pay a guaranteed income for a guaranteed period – usually, the rest of your life) don’t deserve their bad reputation. While interest rates are low, and because many of us are living longer, they are expensive in our 60s; but they can be good value when we’re older, or if our health is bad (some insurers offer special rates for particular medical conditions). An option to consider is buying an annuity at (say) 75, to guarantee (say) half the income you want to draw, and continuing to draw down from your remaining pot.

I’ve just described what the law allows. However, your plan’s documents might contain tighter terms than this: ask your financial adviser. Don’t ask me: I’m not FCA-registered.

About John Firth

Long before he became an editor, John Firth worked in pensions. He suggests we need to see savings as different pots for different purposes.

 

 

About the CIEP

The Chartered Institute of Editing and Proofreading (CIEP) is a non-profit body promoting excellence in English language editing. We set and demonstrate editorial standards, and we are a community, training hub and support network for editorial professionals – the people who work to make text accurate, clear and fit for purpose.

Find out more about:

 

Photo credits: Old Man of Storr by Matt Thornhill; calculator by recha oktaviani, both
on Unsplash.

Posted by Abi Saffrey, CIEP blog coordinator.

The views expressed here do not necessarily reflect those of the CIEP.

 

What editors think about planning financially for the future

Last month, Liz Jones asked in the CIEP forums for editors’ thoughts on preparing for the future, from a financial point of view. Liz mentioned pensions specifically, but it became clear from the responses that the picture is more complicated than that.

Some people described how they were able to save a good chunk of their earnings each month or year. For many others, especially when working freelance, earnings can fluctuate, so it can be difficult to save a fixed amount per month, or to save as much as we think we should be saving! This article considers the different approaches editors have, and also provides a list of useful links recommended by members.

  • Starting to save
  • Dividing up earnings
  • Pensions
  • ISAs
  • Other investments
  • State pension (in the UK)
  • Financial advice
  • Not stopping
  • Summing up – there’s no one size fits all, but make a start!
  • Useful links

Starting to save

One point that came up again and again was that it was more important to make a start with saving for the future – any kind of start – than it was to be able to implement the perfect retirement plan right away. It turned out I wasn’t the only editor who, until recently, had been burying their head in the sand, hoping the future wouldn’t apply to them. Obviously, there are ideal levels of savings to aspire to, which might keep us in the style to which we’ve become accustomed. But if that isn’t achievable right now, because of fluctuating earnings and other financial commitments, it’s still better to start saving something than nothing at all, and then build things up over time.

A tip I heard was to frequently (say, every six months) raise your pension contributions by £5–10 or so. You won’t feel it, but it all starts to add up.
– Sophie Playle

Dividing up earnings

Various editors who responded said that they saved 30% or even 50% of every single invoice, putting aside this money to cover tax, National Insurance, pension(s) and other savings. However, this is clearly not possible for everyone to achieve, and a lot depends on levels of earnings, stability and regularity of earnings, other sources of household income and other financial commitments. A clear theme was that everyone’s circumstances are different, and no advice can apply equally to everyone. Others explained that they set aside fixed amounts each month to pay into pots to cover tax and savings. Any surplus left over in the business account in good months could then be invested in one-off payments to pensions or to buy business equipment.

Pensions

Most of the editors who responded were thinking in terms of pensions as the main way to save for their future. Obviously this is a huge and complex subject, and off-putting to many, and John Firth has written a useful introduction to this topic here. Many editors reported that they had small pension pots (sometimes several) from past employers, and some had decided to consolidate these to make them easier to manage. Several people shared useful links to advisory services (see the ‘Useful links’ section, below).

The key was to stop thinking, ‘Well, I haven’t got enough time left to accumulate a sensible pension’, and start thinking, ‘Where is the money I am able to spare likely to grow best?’ From this point of view the label ‘pension’ is incidental (although obviously the attached rules and regulations still have to make sense for the individual’s position).
– Kersti Wagstaff

ISAs

The other main type of savings account people mentioned, apart from pensions, was the Individual Savings Account, or ISA, which is relevant to savers based in the UK. Some people had ISAs as well as pensions, while others were saving only into an ISA. This is an example of where taking professional financial advice can be crucial.

I followed the advice of a financial adviser about 11 years ago, and set up an ethical stocks and shares ISA … I pay into it every month, and it has performed very well indeed during that time … I’m really glad that I got the advice at that point.
– Hester Higton

Other investments

Aside from pensions and ISAs, people also mentioned factoring the value of property they owned into retirement plans. Other suggestions included investing in businesses via crowdfunding appeals, and even investing in art.

State pension (in the UK)

Editors based in the UK mentioned the state pension as forming an important part of their retirement plans, even if they did not expect to be able to live on it on its own. The benefit of the state pension is that it is protected from inflation. However, receiving the full state pension does depend on a record of National Insurance payments. Several editors mentioned that because they had lived outside the UK for periods earlier in their lives, their state pension had been impacted. You can check your UK state pension entitlement here.

Financial advice

Another common theme was the importance of taking professional financial advice. Many members commented on how pleased they were that they’d consulted a financial adviser over retirement planning (even if that wasn’t what they’d originally approached the adviser for). Others wondered if they had enough to approach a financial adviser to talk about. The general feeling was that retirement planning was such a big and important subject – with such far-reaching significance for most of us – that it was well worth consulting a professional. Just as we would advise people considering editing their own books or getting their mates to do it …

Anyone who is considering moving overseas would be well advised to do their research. I had a small personal pension and planned to move the money to an Australian fund but was caught out by a change in UK law after I moved here. It prevents me from moving the money until I turn 55.
– Kerrie-Anne Love

Not stopping

Not all members who responded were counting on retirement, or expecting to stop editing completely. Some members wrote that they positively wanted to continue working because they enjoyed it, while also managing to save more now they were older.

Summing up – there’s no one size fits all, but make a start!

In summary, it’s clear that planning financially for the future is a very individual decision, and there’s not going to be a solution that suits everyone, or indeed is possible for everyone. But the most important message seemed to be that it was better to get something in place to help manage your finances and support yourself in the future than nothing at all – and that it was never too late to do this.

Useful links

Thanks to the following contributors

Louise Bolotin, Catherine Booth, Margaret Christie, Hannah Close, Louise Duckling, Catherine Dunn, Kate Haigh, Jane Hammett, Kay Hawkins, Hester Higton, Gerard M-F Hill, Andrew Hodges, Margaret Hunter, Sue Littleford, Christopher Long, Kerri-Anne Love, Sarah Lustig, Kathleen Lyle, Hetty Marx, Christina Petrides, Sophie Playle, Abi Saffrey, Cory Stade, Melanie Thompson, Kersti Wagstaff, Anna Williams.

About Liz Jones

Liz Jones has been an editor since 1998, and freelance since 2008. She works on non-fiction projects of all kinds, for publishers, businesses and independent authors. She’s
also one of the commissioning editors on the CIEP information team.

 

About the CIEP

The Chartered Institute of Editing and Proofreading (CIEP) is a non-profit body promoting excellence in English language editing. We set and demonstrate editorial standards, and we are a community, training hub and support network for editorial professionals – the people who work to make text accurate, clear and fit for purpose.

Find out more about:

 

Photo credits: hazy mountains by Simon Berger; growth by Micheile Henderson, both on Unsplash.

Posted by Abi Saffrey, CIEP blog coordinator.

The views expressed here do not necessarily reflect those of the CIEP.