Later pension payouts mean it's time to think again
Thousands of women approaching pension age will be told next month their working life just got longer, but the massive changes will affect us all.
Saturday 12 September 2009
At the start of next month, nearly 185,000 women will receive letters telling them that they will start getting the state pension up to one year later than they would otherwise have expected. This mailing from the Pension Service not only contains vital information for each individual recipient but marks a major turning point in the UK's pension provision.
The state pension, currently claimed at minimum ages of 60 by women and 65 by men, is on its way up for the first time since David Lloyd George introduced the "old age pension" of five shillings a week 100 years ago. All women turning 60 on, or after, 6 April next year will have to wait beyond their 60th birthday to get the benefit. Exactly how long their entitlement is put back depends on their exact birth date. And these letters will give that precise information to each woman.
The October mail-out is just one batch among 12. In total, nearly 1.9 million women born between 6 April 1950 and 5 April 1955 are being contacted and given details of their revised pension age, which will be somewhere between 60 and one month and 64 and 11 months. Women born later will, at the earliest, get the state pension at age 65.
Major as this change will be, it is just one in a spectrum of fundamental developments that will alter the pensions landscape for most of us alive today.
"The world at retirement is in a radically transitional period," says pensions expert Stuart Bayliss, director of the Annuity Exchange.
"We are all living longer," says the pensions minister Angela Eagle, explaining the main reason behind the change in retirement ages, in an interview with The Independent. "We expect the first person to live to 120 to get there in 2063. She's retired already and receiving a pension."
In general, we can expect five major trends over the coming years. First, the state retirement age will go up further: to at least 68. Secondly, carrots and sticks will increasingly be used to get individuals and employers to make private pension contributions. Thirdly, significant changes will be introduced to make pension planning still worthwhile. Fourthly, there will be mistakes and losers along the way (as seemingly small technical changes can have substantial repercussions). Finally, a growing minority of individuals will get more involved in their own retirement planning and, in many cases, will vastly improve their position as a result.
In all of this maelstrom of change individuals should not lose heart. Many of these developments will have a positive side. For instance, the rise in women's retirement age is accompanied by other changes that mean far more women get the full basic state pension. But the one thing that none of us should do is just to forget about retirement planning.
In the past, employers and the state took executive decisions on pensions on our behalf. In future, there will generally be more personal freedoms (such as the ability to work longer in life and to control your own individual retirement plan). This freer environment will probably penalise people who do not keep informed. And, says Dr Deborah Cooper, pensions expert at actuary Mercer: "Choices are always made easier if you have got some sort of financial security behind you."
Both men and women under the age of 31 (more precisely those born after 5 April 1978) will have a state retirement age of 68, under timetables already laid out by the Government. For 31- to 41-year-olds (those born between 6 April 1968 and 5 April 1978) the state retirement age is set at 66 or 67. And for 41- to 51-year-olds (born between 6 April 1958 and 5 April 1968), it is set at 65 or 66. Robin Ellison, a former chairman of the National Association of Pension Funds, predicts a new non-means-tested state pension age of "70 or later" but at a more generous level than today's £95.25-a-week.
The minimum pension age is also going up for private pensions, from 50 to 55, on 6 April next year. Planning for this is "a must for those close to retirement", says Tom Stalkartt a financial planner at BestInvest.
For instance, a 50-year-old with a personal pension could start drawing that pension now. But if they leave the decision beyond April next year, they will not be able to draw their pension until age 55. But taking the pension at 50 is not a light step either, says Stalkartt: "You should bear in mind that if you retire at 50, you could be relying on your pension fund to support you for over 30 years. That's a long time to regret a decision made in haste!"
More people are likely to work beyond their early 60s in future. Legislation making it easier to work and draw pensions at the same time will increase this trend.
From April 2012 up to seven million employees who currently make no private pension provision are expected to be opted into employer schemes. A new system of "auto-enrollment" will require employers to put their workers into pension schemes unless those workers specifically ask to opt out. By 2014, employers will need to be contributing 3 per cent of pay into each opted-in employee into a pension scheme, topping up a minimum 4 per cent contribution from the worker.
Although some employers that currently contribute more than this minimum may decide to cut back to the 3 per cent level, good pension schemes will still required by companies competing in tough recruitment markets. Robin Ellison expects to see the rebirth of attractive final salary pension schemes, albeit in a somewhat different legal form, in some organisations.
Incentives for pension planning
"We will have a Euro-denominated annuity in the next two years," predicts Stuart Bayliss, highlighting just one of several legislative and product development changes he expects. With over one million UK pensioners living in Spain, France and Italy, there is huge potential demand for annuities – the monthly payment plan you buy with a private pension fund on retirement – in foreign currencies. Similarly, Bayliss expects the Government to take steps to restore the attractions of building up pension funds.
Annuities, whose payout rates are linked to interest rates, are seen as poorer value than they were 10 years ago. Bayliss believes more pensioners will put off buying annuities until the latest possible age of 75, drawing some income in the meantime from a "drawdown plan". These plans were only advisable with funds of £100,000 or more in the past, but are now being marketed for as little as £10,000.
People who build up pension funds from which they buy annuities are vulnerable to fluctuations in investment markets and interest rates, as many people retiring now know to their cost. Many pension plans lost over 40 per cent of their value in 2008. Final salary schemes are not safe either. The Pension Protection Fund (PPF), which takes on the liabilities of these schemes when their employers fail is "absolutely doomed", says Ellison, and highly likely to reduce the benefits it pays out. He says the PPF is just one example of many badly-designed features of the pensions landscape which are in serious need of reform.
Retirement: How to plan for the future
* Decide to invest in a pension plan early on. If you get into the habit of paying into a pension at a young age, you will miss that money less, and you will have decades for your money to grow through compound interest. Tax relief and employers' contributions also make pensions a worthwhile investment vehicle for most workers.
* Make your pension a part of your retirement planning. As well as having a pension scheme, you should also be building up other more accessible assets (in accounts such as ISAs, deposit accounts and National Savings, for instance), buying a property and paying down debts.
* Keep on monitoring your private and state pension entitlements. Few advisers fully understand the state system even though it is a vital part of pension planning. Check your own exact state retirement date on the calculator at www.thepensionservice.gov.uk. If you want to do anything unusual with your private pensions, such as retire early or go overweight in China, then you need to take a more proactive role since advisors and employers tend to manage funds with Mr Average in mind.
* Be interested in your retirement planning, rather than leaving it to advisers or your employers to do it all for you. A lot of people use online facilities to monitor their pensions daily, weekly or monthly and some of the online gadgets are entertaining. Hargreaves Lansdown has introduced a "Portfolio X-ray" for clients, which shows them maps and graphs of where their pensions and other investments are located around the world.
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