If you thought a pension was too mundane for the rich and famous, think again. Britain’s millionaires have found a creative mix of venture capitalism, property investment and more traditional plans to save for retirement.
Over the years, Telegraph Money has spoken to household names from the sporting, entertainment and business worlds about their finances. Read on to find out who successfully retired at 35 and why one actor has sworn against pension saving. And see the analysis, below, from the experts on whether they are doing the right thing.
Virginia Wade won Wimbledon in 1977, when the prize money was £13,500, but the tennis star says that her real moment of luck was taking her pension out of Equitable Life before the company went bust. “I now have a substantial international portfolio and at this stage of my life I’m focusing on low-risk and high-return investments. My financial adviser proved invaluable when I had a couple of close calls with Lloyd’s of London and Equitable Life.
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“I was very lucky with Lloyd’s. My people didn’t like what was going on with one syndicate where the underwriters had taken themselves out, and swift reallocation of my assets minimised the effects.”
Risky underwriting meant individual investors, or “names” were called upon to cover loses in the early Nineties with many facing financial ruin.
Wade continues: “Likewise, most of my pension was in Equitable Life, but we took it out before the insurance company really went down the tubes. I was so fortunate because, of course, some people lost everything.”
Now 40, former Wales captain Gareth Thomas earned 100 Test caps and retired in 2011. He’s hung up the rugby kit but has recently appeared in Celebrity Big Brother and Dancing on Ice.
He’s also now a pensioner, thanks to saving into a private pension as a teenager and being able to take advantage of rules that mean sports people can retire at the age of 35 (see right). Having had a peak salary of £285,000, he was able to accumulate a decent-sized pot. It’s a long way from his early life working in a factory in Bridgend, South Wales, aged 16. “When I became professional at 18 I went from £135 from working in the post office and £10 for rugby a week to £25,000 a year. It was a very big time for pensions so my parents encouraged me to put as much into mine as I could.”
As a panellist on BBC Two’s Dragon’s Den for nine years, you would expect Theo Paphitis to have a good handle on numbers and financial planning.
He made his money from property finance and telecoms but mostly from retail, namely the lingerie chain La Senza, which he sold in 2006 for £100m. He is estimated to be worth a total of £250m and lives in Weybridge, Surrey,
“I have both a personal pension and a long-term financial strategy,” he says. “I set up a pension when it was prudent to because of the tax-relief schemes at the time. I am not planning to retire any time soon, though [he is 55]. I am very fortunate, my personal wealth, my financial investments whether they be material, property or financial, God willing, should see me and Mrs Paphitis off to our nursing home quite comfortably. I have a balanced portfolio. I have properties, stocks and shares ... cars, you name it. I don’t follow the stock market personally.”
Larry Lamb, aged 67 and best known for his roles in Gavin & Stacey and EastEnders, says he lives within his means but doesn’t save into a pension.
“The problem being a self-employed actor is that you have to have a generous overdraft,” he says. “My biggest indulgence is my children as I don’t have a weakness for food, drink or clothes.
“My biggest financial regret is paying into my pension – everything’s in turmoil nowadays. When I realised that the pension I’d been paying into religiously for years (because that’s what was drummed into you) wasn’t going to amount to anything, I wished I’d put those payments towards my mortgage instead.”
Dermot Murnaghan, 57, is a much in-demand television presenter, having been an anchor on BBC Breakfast and ITV News. He was interviewed for our Fame & Fortune series in 2010, three years after moving to Sky News.
Despite a bad experience, he remained committed to pension saving. “I have a beef about rubbish financial advisers,” he says.
“The biggest mistake I made was listening to them in the Eighties when I started my pension. The advice I received bordered on the dishonest. I was completely unclear about charges and the cost of switching to other funds. But pensions are a good idea if you read the fine print. It’s not pensions that are wrong, it’s the plans we were encouraged to buy.’’
Eighties pop star Nik Kershaw made a fortune from his own hits but one of his biggest money-spinners was writing Chesney Hawkes’s massive 1991 hit, The One and Only. He says: “Having a catalogue of songs is like having a pension. That song has made me millions of pounds over the years, along with The Riddle, Wouldn’t it be Good and I Won’t Let the Sun Go Down On Me. It’s put my kids through university and private school.”
He also has “bits and pieces in property” but has remained a committed pension saver. “I have a pension and when I was earning well I put big premiums in, because I had a very good accountant who said, 'You’ve got all this money coming in – stick it in a pension.’”
The attitude to savings of Professor Alice Roberts, 41, is typical of many people who are decades from retirement — she hopes a company pension might be enough and that property might be the answer.
The academic-turned-TV presenter told our Fame and Fortune series two years ago that her priority, rightly, was to tackle her interest-only mortgage. She said: “Yes, I had a pension when I was working at Bristol University and now I have a pension with my new salary at Birmingham University, but I don’t have any separate personal pension. I don’t really know if it is worth taking one out — I suppose I am looking at property as a long-term strategy, but that is very much on the horizon. I haven’t made much progress on it yet.
“Probably, like a lot of people, I think I should [meet regularly with a financial adviser]. Stocks and shares put me off as it seems like gambling somehow. They aren’t on my radar. I don’t have any Isas. I have one savings account and that is it, although I have invested in a child trust fund for my daughter. That seemed like a sensible thing to do.”
And the pension plans that won’t impress the experts ...
Karren Brady, the entrepreneur who has appeared on Dragons’ Den and as consultant to Lord Sugar on The Apprentice, prefers to invest elsewhere. “I don’t have a pension – I’m neutral about them. I prefer to be my own pension. I know I could run a Sipp, but I think life’s too short and it would be another thing to worry about.”
Other celebrities also take a far too relaxed approach to planning for retirement. When asked about his retirement plans, Dereck Chisora, British European heavyweight champion who said he had made £3.5m, said: “If I die who is going to spend that money? Some guy. No way, I don’t have a pension.”
The verdict
Although the annual pension saving allowance of £40,000 a year may seem insignificant to someone earning millions a year, it makes sense for them to take advantage. It also makes sense for those of us with smaller incomes, especially given the tax breaks.
Contributions go into your fund free of income tax if made via your company scheme. If you put money into a self-invested personal pension, your money is boosted by 20pc and then if you pay tax at 40pc or 45pc you claim back the rest as a rebate via your self-assessment form.
For those who can afford large amounts at a young age, the benefits are sizeable. A £40,000 fund saved between the ages of 20 and 35 accrues £600,000 which, assuming very modest 2pc returns, will grow to £800,000 by age 55.
Rugby player Gareth Thomas, for example, could get his pension at 35 and access it while he was still playing. However, this quirk is only available to sports people who joined an eligible scheme before 2006, so it wouldn’t be applicable to a younger player, for example the England footballer Alex Oxlade-Chamberlain.
Nowadays, the rules mean pension saving is no more beneficial to a celebrity than any other top-rate taxpayer in terms of tax savings.
Generally speaking, most millionaire earners invest in the same types of assets in similar proportions, the numbers just tend to be bigger. “Property is a big hit with footballers and it is often property portfolios that form the majority of wealth,” says Danny Cox of Hargreaves Lansdown.
The rental income is taxable, as are gains when properties are sold, so this is not the most tax-efficient way to invest.
Millions of Britons may be considering a buy-to-let or other property investment once new pension freedoms come into force in April. This will allow savers to withdraw all their money from age 55, 25pc tax-free and the rest subject to income tax.
We set out three examples of the tax you will pay here. Withdrawing money to invest in buy-to-let could leave you with a big tax bill upfront as well as liabilities further down the line.
Consider also that property is a high-risk way to deploy your savings because it is largely a “geared” investment: you borrow money. You put down £50,000 on a £200,000 home, and if it falls 10pc in value by the time you sell, you’ve lost £20,000 on a £50,000 investment — a 40pc loss.
Virginia Wade’s plan of diversified investing over a period of time is a wise one — particularly as she has decided to reduce the risk she’s exposed to later in life. “Anyone with high earnings for a short period of time, for example athletes, should invest in products where the tax liability is deferred,” says Mr Cox.
In most cases, the less you earn, the lower the rate of tax you pay. This could include the profits on shares or funds that pay little or no income, and are only taxed when cashed in, so a sizeable portfolio can be held for years with the tax liability deferred.
Higher earners may be tempted into riskier investment schemes that promise to save tax. Venture Capital Trusts (VCTs) have the benefits of being able to invest £200,000 per tax year and receive up to 30pc tax relief and they provide tax-free dividends. “These invest in very small companies and are higher risk for sophisticated investors but in the right portfolio work very well for ultra-high earners,” says Mr Cox.
Enterprise Investment Schemes have even better tax breaks: 30pc income tax relief, capital gains tax deferral, and inheritance tax relief. These can shelter up to £1m in a tax, but are riskier still.
Mark Sands, an insolvency lawyer at Baker Tilly, says: “Sometimes investments can go wrong. Shane Filan from Westlife famously invested in property — he didn’t make a bad decision, because he didn’t know the market was going to collapse.”
Celebrities have more money than most, but this comes with risks of its own. “When a celebrity’s earnings aren’t the same as they were at their peak, they need to adjust to the new income level. If they haven’t they will go bankrupt,” says Mr Sands.
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