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Pensions – all change

The pensions landscape appears to be constantly changing and becoming ever more complex yet pensions remain one of the most tax-efficient investment vehicles.

We regularly hear about the “demographic time-bomb” – people are living longer, needing more pension in retirement whilst the number of working people who fund State Pension payments is falling. The government has introduced a number of changes:

  • staged increases to State Pension age
  • a recent change to how State Pension entitlement is calculated
  • mandatory auto enrolment to workplace pensions to encourage personal saving
  • plans to introduce the Lifetime ISA (LISA) in 2017 – some see this as a viable alternative to a pension
  • a series of legislative changes; the so-called “pensions freedom”

There is, no doubt, greater flexibility available but at a cost of more complexity. The Bank of England Chief Economist commented “I confess to not being able to make the remotest sense of pensions”. There is also concern that the need for long-term pension planning may be at odds with short-term political delivery.

Even those people who are committed to saving towards their own retirement face a number of issues:

  • the workforce is more mobile than before and most people will have contributed to several workplace pensions. It may be difficult to track the performance of these schemes; there is discussion of creating a “pensions dashboard” to provide a single view of all the schemes that an individual may have invested within.
  • Traditionally, employers offered Defined Benefit schemes, often referred to as Final Salary or Career Average schemes. Many employers have withdrawn these benefits as the cost of funding them has become prohibitive. Every week, there are news articles discussing the funding shortfall for prominent companies and questioning whether they will be able to meet their pension commitments e.g. BHS, Tata Steel etc.
  • The pension freedoms have attracted fraudsters who have misled or stolen from investors. Thankfully, it is a relatively small problem but is a risk that impacts what is for many, their biggest investment.
  • The at-retirement market has changed massively with the purchase of annuities seeing a huge decline and being replaced by drawdown products or blended solutions. Drawdown offers greater functionality and continued investment potential but introduces uncertainty and the need to ensure that you don’t run out of money in retirement.

There are a few lessons that I would draw out of this complex, changing issue:

  • You need to take responsibility for your own financial well-being in retirement; the days of relying on State Pension are limited, if not already gone.
  • Retirement is almost certain to cost you more than you think. You need to have a pension fund and/or other assets/investments that will support you for many years after you retire; some of this time may incur the expense of residential care.
  • Don’t think that a pension is something you start in your forties or fifties. The sooner you start to save the greater the effect of investment returns over many years.
  • Most people contributing to their own pension get tax relief on the contributions they make. This makes investment in a pension one of the best performing methods of saving. Business-owners have even more beneficial options available.

To discuss how we can help you to make the right pension decisions, contact us.