Pension Freedoms and the problem of youth

Whilst the vast majority of the UK populace has quite rightly been very happy with the changes and additional flexibility given to pension savers, a thought should be spared to some of the restrictions that will be placed on pension savers in the years to come.

Pension headlines have quite rightly been dominated with the good news of “accessing pensions from age 55”, “more flexible annuities to meet lifestyle”, “free guidance for all”, “changes to the 55% tax on death benefits” etc., what has seen little comment, however, is that from 2028, the age that savers can access their pension funds is rising from 55 to 57.  In addition, the recent government announcements have confirmed that from 2028, this age will be linked to being 10 years below the state pension age.  If the coalition’s proposals from 2013 to accelerate the state pension age are accepted, younger savers starting their careers today might not be able to access their state pension until age 70 and therefore their personal arrangements until age 60.  

Whilst it is very clear that The State cannot afford to pay pensions for an ageing population under the current rules, this linking of personal pension to state pension seems to be quite a contrast to the driving force behind the revolution in pensions we are seeing, and might be a reason for a future generation to tell us the we never had it so good (for once).

What is clear is that if early retirement is the goal, savers will need to make effective financial plans to give them the freedom to stop working when they desire.  This could and should include using other savings vehicles, such as NISAs in addition to their pensions so that they can bridge the gap between when they want to stop working and when they can access their pensions albeit in a far more flexible manner than has been available to them previously.

Duncan Wilson

Private Client Partner

Telephone: +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk

What is a pension?

Actually this is a pretty good question, given that several million people will have one by 2017 and as I know from years of employee pension talks that not many people actually understand what they are.

The technical answer probably runs something like “a tax efficient savings vehicle with limitations around contributions and decumilation” – which means nothing to anyone outside the pensions industry!

Simply put its “one way of saving for retirement that’s got a few incentives to it”. Now I do like a good pension plan. It’s one of the ways that the Government encourage people to save.

If a person puts in 80p then they get the other 20p they’ve paid in income tax put into the pot as well (more if they’ve paid a higher rate of tax). It’s invested in the pot and hopefully grows tax efficiently in the pot until you take it out (although the value of the investment can go down as well as up).

Once the money’s in the pension, it can’t be accessed until you are 55 – which is great for stopping you spending it on holidays / cars / extensions – it’s not supposed to be for that type of expenditure.

There’s been a lot of bad press about pensions over the years and I’ll be the first to admit that they aren’t perfect. However, for a lot of people they are a very good way of saving for retirement. We are helping employers cope with new legislation where they have to auto-enrol employees into a pension. You’ll find more information on our website.

Rob Barksfield

Auto-enrolment Consultant

Telephone: +44 (0)20 7893 3972

Email:  contactus [@] broadstoneltd.co.uk

State Pension Age Rise – An Insight into the future

The Chancellor recently announced that the increase in State Pension Age needs to be accelerated. This throws up some huge challenges for society.

 

Individuals must plan

We’re all going to be working longer and the temptation to allow the powerful forces of both procrastination and lack of foresight to do their worst and put off saving for the future is a strong one.

If individuals want to cease working sooner then pension planning actually becomes more relevant, rather than less so, when providing that replacement income.  Individuals must decouple the rising State Pension age with the time to cease working completely.

Pensions must adapt...

 

Government policy and the financial services industry must do a number of things now to stem this:

• Financial education in the schools to actively espouse the benefits of long-term savings in to a pension scheme.

• The Government needs to re-open the debate on early access.

• Pensions may have to end and become something else so they can be accessed for other socially helpful purposes such as health care provision. Or defer your tax-free cash as an invested lump sum to help. Or why not let a pension scheme run a retirement home for its pensioners. Part of the pension can be an income and another proportion of the pension could be accommodation and health care.  

Savers need to be encouraged to save and understand that it’s their responsibility to provide for themselves in their dotage. 

Employers - the front line

Employers are going to be at the front line of this problem. I am all for removing restrictions and allowing individuals more flexibility in their lives. However, there is a risk that employees will not be able to afford to retire.  Succession planning will falter, younger employees will be held back as older colleagues remain in the workforce and businesses will under-perform and potentially fail.

David Brooks
Pensions Consultant

 

Telephone: +44 (0)20 7893 3456

Email:  contactus@broadstoneltd.co.uk