Do I really need to save that much for a pension?

Do I really need to save that much for a pension?

There is much talk – particularly from pension salesmen – about the extraordinary amounts we should save for an adequate retirement income. But is this just the pensions industry “talking its own book”? Surely at retirement with my mortgage paid off, some savings and less need for new clothes, I could survive on significantly less – say £800 a month in today’s money. Rather than the claimed “ideal”, what’s the minimum pension saving a 43-year-old such as myself could get away with?

Tom McPhail, head of pensions research at financial advisers Hargreaves Lansdown, says that how you choose to save for retirement is secondary to making some provision.

If you want a retirement income that doesn’t depend on the state’s largesse, you will almost certainly need to save through your working life. Independent research, including from the Financial Services Authority, shows that a pension plan is the most tax-efficient way to save for retirement.

You don’t have to use a pension, but there are the tax breaks (particularly upfront tax relief of 40 per cent if you are a higher rate taxpayer). If you want a retirement income of £10,000 a year (in today’s money), saving from the age of 43, you need to put aside around £600 a month. This assumes retirement at age 65, investment growth averaging 7 per cent a year, and an inflation-proofed income in retirement. If you leave it another five years before you start saving, the cost of accumulating this retirement income will go up to around £825 per month.

Everyone has their own idea of what income will suit them in retirement, based on standard of living, personal circumstances, mortgage etc. Some will be able to tolerate a big drop, others will not. Some will use a pension plan, others will use individual savings accounts (Isas), buy-to-let, perhaps rely on an inheritance, or a combination of all these.

Key is that it won’t happen by accident. It is okay to arrive at retirement with a small pension, but likely to be less acceptable if that is a surprise. If you want to explore how much you should save, use an online target funding calculator, such as on the FSA’s and Hargreaves Lansdown’s websites. You should review your retirement savings plans at least once a year to take account of any changes in circumstances.

Members may enjoy a windfall from club closure

Who owns working men’s social clubs? The club my father has been a longstanding member of will almost certainly close following the smoking ban. Run by committee, it has no debt, some funds in the bank and, most important, a mortgage-free property. Could there be a potential windfall for members?

Charles Staveley, partner at solicitors Mills & Reeve, says working men’s social clubs are usually owned by their members who would stand to share the benefit of any remaining value on closure.

Clubs can either take the form of registered clubs or unincorporated associations. If registered, its dissolution will be governed by the Friendly Societies Acts of 1974 and 1992 or the Industrial and Provident Societies Act 1965, depending on when it was registered. It is compulsory for registered clubs to appoint trustees and these should be consulted on the dissolution process.

If the club is an unincorporated association, it is also owned by its members. It will be governed by its own rules which are likely to stipulate how dissolution should take place. Usually the property and assets of the club are vested in trustees and held on trust for the benefit of all club members. It is important to note that property and assets are owned in equal parts by every member and when realised they must be divided up accordingly. This will only differ if the rules expressly state otherwise.

Trustees can instruct agents and solicitors and make decisions on the sale. They have fiduciary duties to the members, for example achieving the market value price on the property, and if these are breached, a member can pursue a claim against them.

Can parents gift money and enjoy the interest?

My parents are looking to reduce their estate for inheritance tax planning purposes by gifting around £100,000 of cash to me and my brother. They still want the interest on the money. The plan was for us to pay them an amount per year equivalent to what they might obtain from a savings account. What are the tax issues? Would this be classed as a reservation of benefit and so not be IHT efficient?

Phillip Wood, wealth advisory director at accountants PricewaterhouseCoopers, says there are complex anti-avoidance rules concerning gifts where there is an expectation of some form of ongoing benefit. In a worst-case scenario, HM Revenue & Customs (HMRC) may deem the gift to be “a gift with a reservation of benefit” and that for inheritance tax purposes it would not fall outside your parents’ estate. The law in this area is complex and you should seek professional advice. For example, it is not normally possible for a parent to gift their house to their children but continue to live in it without falling foul of the rules. But it would be possible to gift money and, providing there was no expectation of repayment of capital or interest, this would be classed as an outright gift.

Under normal circumstances, an outright gift would be a potentially exempt transfer (PET) and providing your parents survived seven years from making the gift, it would fall outside their estate for IHT.

The idea of giving away capital but with the right to the ongoing income can be achieved by using certain products, often known as discounted gift schemes. These typically involve the use of trusts where the parent makes a gift of capital into the scheme and in return receives the ongoing income. The capital falls outside the parent’s estate in stages over the next seven years. These are complex products that aren’t suitable for everyone and you should seek professional advice.