My daughter’s in the Navy — where should she start with her pension?
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Ask the experts. Rachel Vahey is here to answer questions on pensions. If you’d like a question considered for a future edition send it in now.
My daughter has just completed her first year in the Navy and is considering setting up a personal pension because she has an excess of cash, what can you suggest?
I have a SIPP with you but not sure I want the responsibility of her pension too, since at the moment she does not have the time or knowledge herself to manage it, although this may change in the future. She has a shares ISA that I manage, savings and a few investments.
We look forward to hearing from you.
Chloe
Rachel Vahey, AJ Bell Head of Public Policy, says:
Congratulations to your daughter for completing her first year in the Navy; that is a great milestone.
It’s no wonder at this juncture that she is starting to think seriously about her future finances, and it’s good she realises she’s in a place to save more for her later life.
Your daughter will probably have been automatically enrolled into the Armed Forces Pension Scheme (AFPS), and unless she opted out, she will be building up a pension under this scheme.
This is an extremely generous defined benefit pension scheme, which promises to pay her a pension income linked to her salary and how long she is in the Navy for. She doesn’t have to pay any contributions into this pension scheme but will still receive this pension at her retirement age.
How can you supplement a naval pension?
It’s possible for her to save more for her pension through the AFPS. If she pays Member Voluntary Contributions (MVCs) she can buy ‘added pension’. This option lets members pay extra to boost the amount they’ll get from their main pension scheme. Your daughter should check the details to see how much extra pension she can buy, but it’s likely to offer good value and could make a real difference to her retirement income. Plus, the money she receives from her pension should go up every year once she starts getting it.
She may want to make these enquiries whilst she is still young. The cost of buying the same amount of additional pension will increase as she gets older, so if she currently has the funds to make this investment then this may represent very good value for her at this moment in time, rather than waiting until she is older.
These are complicated decisions and your daughter may want to speak to the AFPS or ask a regulated financial adviser for a personal recommendation.
What about a SIPP?
She could also consider setting up a pension, such as a SIPP, in her own name. There are many different types of SIPP, and it’s possible to set up a low-cost ‘Ready-made’ pension that is simple and easy to manage. These are usually set up and maintained through an app and are designed to make investing easy for beginners by cutting-out jargon and offering straightforward investment options. Backing them will be a raft of useful support from the provider.
These types of pensions fit in well with a ‘hands-off’ approach and are a useful introduction into the world of investing. Once your daughter has more time and knowledge, she could then move to a different type of SIPP with more investment options.
People can save into as many pensions as they want at the same time. There are limits on how much she can save tax-efficiently. She can personally save as much as her UK earnings. There is also a total limit on the amount that can be saved in her pensions each tax year which is usually £60,000. This includes the value of the pension benefits built up in the AFPS that year. The AFPS will work out what counts towards this limit – known as the ‘pension input amount’ – and they can let her know how much of her allowance she used last year.
Don’t forget about ISAs
One final thing. Your daughter may also want to consider increasing the amount she pays into her ISAs, especially if she wants to maintain the flexibility to access her money. She can then gradually increase the amount she saves into a pension as her earnings increase.
Rachel Vahey: Head of Public Policy
Rachel is AJ Bell's Head of Public Policy. She helps financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients.
Rachel...
