10 COSTLY PENSION MISTAKES

MILLIONS OF BRITONS MAKE

One College Square South, Anchor Road, Bristol, BS1 5HL www.hl.co.uk

WHAT ARE THE 10 PENSION MISTAKES MOST PEOPLE MAKE?

Everybody makes mistakes in life - and pensions are no exception. The only dierence is you could pay much more - and over a longer time - for pension mistakes than for any other. Why? The latest life expectancy gures reveal 65 year old pensioners today are expected to live o their pension for an average of 21 years (men) and 24 years (women) - nearly a quarter of their whole life. Today more than ten million people in the uK can expect to live to see their 100th birthday - 17% of the population. The younger you are today, the longer youre expected to live, the more pension mistakes could cost you.

ThE lONgER yOu dElAy, ThE MORE IT cOSTS yOu TO buIld A gOOd PENSION

1. NOT SAVINg ENOugh

Millions of people face a "bleak old age" - said Lord McFall, chair of the Workplace Retirement Commission. Almost four in ten British adults don't have a pension, including 1.4 million who are within a decade of retiring. How do you know if youre saving enough? People want on average 24,300 a year to live comfortably when they retire. According to the Oce for National Statistics, in 2008/09 the average single male pensioner had a pension income of 304 a week or 15,808 a year thats a gap of nearly 10,000. Is your pension on track? Discover the retirement income you could receive and how much you should consider saving to meet your target. Plus, what impact do ination and charges have on your pension? You can nd out with our free online pension calculator at www.hl.co.uk/calculator.

2. dElAyINg SAVINg
Quite simply, the longer you delay, the more it costs you to build a good-sized pension. This is because of 'compound interest', which Albert Einstein called "the most powerful force in the universe". Here are three examples of the cost of delaying. Let's assume you pay 125 a month into a pension and the fund grows 5.5% a year after charges. What's the dierence if you start contributing at age 16, 30, 40 or 50? Roughly speaking, every ten-year delay wipes out half of your fund's potential growth. The table above shows the gures. Of course, these are just projections; the actual return could be less or more than this. The gures show the values in today's terms, without considering ination, which will reduce the spending power of money over time. Moreover investments are not guaranteed: they can go down as well as up in value so you could end up with less than you invested. Everything being equal, the earlier you start saving, the more potential your pension fund has to grow. See what this could mean for your pension with our free online pension calculator at www.hl.co.uk/calculator.

IMPORTANT INVESTMENT NOTE Please remember pensions are long-term investments to fund your retirement; you cannot normally access your money before 55. When you do, up to 25% can normally be taken as tax free cash with the balance being made available to provide a taxable income. Investments fall in value as well as rise so you could get back less than you invest. Neither capital nor income is guaranteed. This newsletter is for investors who prefer to make their own investment decisions, without nancial advice, and benet from the best range of initial savings of any UK broker. If you are happy to do this and manage your own pension the SIPP could be for you. If you do not need the exibility of a SIPP, you might consider a stakeholder pension. If you have access to an employers pension scheme you should always consider that rst. This newsletter is not personal advice. If you are unsure about the suitability of an investment, contact our Financial Practitioners for advice. Whilst the tax benets we refer to are those that currently apply, they can change over time and their value will depend on your circumstances. Before you decide to transfer a pension please ensure you understand how the transfer will be made. Unless otherwise agreed the transfer will be made as cash. Remember you will be out of the market while the transfer takes place. This may work in your favour if the market falls, but if it rises you will not benet from any growth while you hold cash. Some pension companies levy exit fees or a Market Value Reduction (MVR). You should also check that you will not lose a valuable guaranteed annuity rate, guaranteed investment return or any other benet. Please make sure you will benet from transferring. This newsletter is based on our understanding of the current legislation which is subject to change. April 2012.
This promotion is issued by Hargreaves Lansdown Asset Management Limited. Authorised and Regulated by the Financial Services Authority (FSA register number 115248, see www.fsa.gov.uk/register for registration). None of these articles may be reproduced without permission.

PROPERTy VS. ShARES 1992 TO 2012

400

UK Nationwide House Price Index (IN) % Growth TR Def GBP FTSE 100 TR (IN) % Growth TR Def GBP

350

FTSE 100 UP 367%

300

250

PROPERTY UP 219%
200 150

100

50

Past performance is not an indication of future performance. Source: lipper hindsight total return to 1st March 2012.

3/ /0 01

3/ /0 01 92 19
-50

3/ /0 01

3. NOT chEcKINg yOuR PENSION POT

If you have a pension have you ever reviewed it? Many people don't. Moreover, recent research revealed an alarming 33% (6.1 million) of those who reviewed their pension couldn't remember the investment option they'd chosen. Yet, not all investments are the same. Even a seemingly small dierence in performance could have a signicant impact on the size of your pot. A 35 year old with a 20,000 pension pot could have a fund worth 55,120 at 65 if his investments grew by 5% a year. His fund might be worth 97,080 at 65 if his investments grew by 7% a year or 169,210 if they grew by 9% a year (assuming in all cases an annual fund management fee of 1.5%). Again, these are just projections investments will not always go up in value, they can also go down, so you could get back less than you invested. Also, these values are in today's terms, without considering ination, which will reduce the spending power of your money over time.

4. NOT chEcKINg If yOuRE gETTINg gOOd VAluE fOR MONEy

Most people know how much they pay for their mobile phone, but not for their pension. Nor do they know what they are paying for. The charges you pay typically buy you the services of your pension provider and the expertise of a fund manager who looks after your investments. In addition, some people employ a nancial adviser to make recommendations. The charge for this advice is usually either paid separately or added to the pension charges. The services you get from your pension provider vary in depth and quality. Things you might (or might not) get include: Ecient administration Good customer service A UK based helpline Quick response times for instructions and enquiries Online access to your pension Online planning tools including calculators and portfolio analysis Clear, concise information Pension and investment research

3/ /0 01 97 19

3/ /0 01

12 20

02 20

07 20

5. RElyINg ON PROPERTy
As the saying goes: an Englishman's home is his castle. But it may also be his largest investment. If you decide to just use property as a retirement fund, you could be putting all your eggs in one basket. Investment professionals agree diversication is key to managing risk, although it doesnt guarantee against loss. So, if you already have capital invested in property, doesn't it make sense to consider diversifying and investing in dierent asset classes? What's more, the property market isn't exactly "safe as houses" as people who had to sell their home in 2008 and 2009 will testify.

6. RElyINg ON INhERITANcE
A quarter of Britons rely on inheritance to fund their retirement but many could nd their plans are resting on shaky foundations. Why is that? Common sense highlights the rst problem with inheritances: you can't be sure when you'll benet from the windfall. The way life expectancy is shaping up, older generations are likely to live well into their retirement years. Moreover, the amount you end up inheriting may be far less than you expect. One in three women and one in ve men aged 65 and over will need to go into a residential care home, according to Department of Health estimates . A single room in a private nursing home now costs 36,000 a year on average . How much will there be left if one pays that much for 2 . . . 5 . . . maybe even 10 years?

7. NOT TAKINg uP EMPlOyER cONTRIbuTIONS

Companies, especially the large ones, usually oer workplace pensions. In many cases, they also oer to pay money into your pension. The good news is that by 2017 all companies in the UK will have to oer a pension to their employees. The bad news is that most private sector workers aren't currently saving into a workplace pension. This means they could be missing out on "free money".

8. ASSuMINg ThE STATE WIll PROVIdE fOR yOu

One in ve people who retired last year will rely entirely on the state pension for their income. This is worrying when you consider 83% of 25 to 54 year olds don't know the value of their state pension and over 30% overestimate how much they'll get. For 2012/2013 the basic state pension will pay up to 107.45 a week. There is a proposal to replace the complex system of basic state pension and additional state pension with a at rate of 140 a week (in todays money). Would that be enough to fund the retirement you want?

dONT MISS OuT ON A hIghER INcOME

Lowest healthy life rate
1,261

Highest healthy life rate

17.8% 1,486 More

High blood pressure and high cholesterol

Heart attack (on medication)

35.7% More

1,712

9. NOT uSINg PENSIONS TO SAVE TAx

Tax relief on pension contributions is one of those rare occasions when the taxman gives you something back. Individuals received 6.9 billion in pension tax relief from the government in 2009/10. This is because under current rules when you pay money into a pension, the government eectively pays 20% of the total contribution (subject to maximum limits).If you are a higher rate taxpayer, the government could contribute 40% or even 50% in total. This means 20,000 in your pension could eectively cost you as little as 10,000. Although the value of any relief will depend on your individual circumstances and tax rules can change.

46.3% More

1,846

Diabetes (insulin dependent + 1 other medication) Stroke (with visual/ speech impairment + stick to walk) Pancreatic cancer (with radiotherapy & chemotherapy) 1,000

48.8% More

1,877

50.5% More

1,898

67.7% More

2,115

1,500

2,000

2,500

Gross income per annum

TAx RElIEf AT A glANcE - hOW yOu cOuld TuRN 5,000 INTO 10,000
When you top up your SIPP, you could get up to 50% tax relief. Here is an example of how it works. 1. You invest 8,000.

Source: HL Annuity Supermarket and Just Retirement, 9 February 2012. Based on a male aged 65 with a fund of 25,000. The annuity is single life and level, with a ve year guarantee, paid monthly in arrears.

10. NOT ShOPPINg AROuNd WhEN yOu RETIRE

Even if you manage to avoid the mistakes above until the day you retire, there's one last trap to watch out for. When you retire, you can usually take up to 25% of your pension as tax-free cash. After that, most people will take a taxable income from their pension. They usually do so by buying something called an "annuity", although this isn't the only option available. An annuity provides a secure income for at least the rest of your life in return for your pension fund. If you have a pension with an insurance company, they'll oer you an income, based on their own annuity rate. The vast majority of people take that option. This, however, could be a very costly mistake - and one you cannot rectify: once you buy an annuity, you cannot change your mind. Annuity rates can vary signicantly, depending on the provider you choose. What's more, there are over 1,500 medical and lifestyle conditions that could help you increase your annuity income. You don't have to be seriously ill to qualify, you just need to request an 'enhanced annuity' and as the chart above shows, you could get thousands of pounds more every year for the rest of your life. As a result, when you shop around for your annuity, you could get considerably more income for the rest of your life.
0412

2,000
2. The government automatically adds 2,000 basic tax relief.

3,000

5,000

3. You could claim back even more via your tax return: up to 2,000 if you pay higher rate (40%) tax or up to 3,000 if you pay additional rate (50%) tax. 10,000 in your SIPP could cost you as little as 5,000. The same tax relief applies to regular contributions.

You must pay sucient tax at the higher/additional rate to claim the full tax relief via your tax return. Remember, tax rules can change over time and the relief you receive will depend on your circumstances.

Hargreaves Lansdown Asset Management Ltd, One College Square South, Anchor Road, Bristol, BS1 5HL. Authorised and regulated by the Financial Services Authority Enquiries: 0117 980 9926