Will your pension let you give up working by 65?
Change is afoot in a pensions sector ripe for reform. But what does it mean for your retirement planning? Rob Griffin reports
Saturday 04 September 2010
Pensions have never enjoyed so much time in the spotlight. Regulatory overhauls, demands from campaign groups and proposals from the new Coalition Government have combined to ensure that the sector has often made headlines. A vision for reforming the state pensions system was unveiled in June by Iain Duncan Smith, the Secretary of State for Work and Pensions, who said everyone needed to take responsibility for achieving the income in retirement to which they aspire.
"Britain used to have a pensions system to be proud of but, due to years of neglect and inaction, we are left with fewer people saving in a pension every year and the value of the state pension has been eroded, leaving millions in poverty," he said.
But where do we stand now? Which of the mooted changes are actually going ahead and when will they take place? What do the experts make of them and are there other pressing issues that are yet to force their way onto the agenda? We consulted financial advisers, consultants and pension providers to draw up a list of the main talking points and to analyse how each one could potentially influence our retirement planning.
Abolition of default retirement age
It was recently announced that the default retirement age was being scrapped. This delighted everyone apart from big business, which questioned whether companies had enough time to prepare, given the new rules were being introduced by October 2011.
Michelle Mitchell, director of the charity Age UK, is in favour of such a move. "Everybody stands to win from scrapping forced retirement as people over 65 will have full employment rights for the first time," she said. "The economy will benefit from older workers' precious skills and experience and their increased buying power. Public finances will receive a boost from more people paying taxes for longer."
However, John Cridland, the deputy director-general of the Confederation of British Industry, said the issue raised a number of questions. "A default retirement age helps staff to think about when it is right to retire and enables employers to plan more confidently for the future," he said. "In certain jobs, especially physically demanding ones, working beyond 65 is not going to be possible for everyone."
Removing the requirement to annuitise by the age of 75
The Government has pledged to end from April 2011 the existing rules which effectively require individuals to purchase an annuity by the age of 75. It believes people should have more choice over the use of their pension savings. Consultation is now taking place, which is due to end next week, to discuss how this should best be removed.
Geoff Penrice, a financial adviser with Honister Partners, thinks this is very good news. "Annuity rates have halved over the past 20 years, and the requirement to purchase one before age 75 has been a major disincentive for people to invest into their pension," he says. "This also means that people using 'income withdrawal' or 'phased' pensions can have a much longer timeframe with regard to their investment choices and asset allocation."
Workplace pension reforms review
More than half of all employers and most eligible individuals support government plans for automatic enrolment into a workplace pension scheme from 2012, according to research from the Department for Work and Pensions.
However, while the Government remains committed to such plans, a review is currently taking place looking at the scope of the proposals, including the age group at which automatic enrolment should apply. It will report back at the end of this month.
Among the issues being examined is whether Nest – the new workplace pension scheme designed specifically for low-to-moderate earners – is the most effective way to access income security in retirement. Mr Penrice believes anything that encourages people to invest in their pension should be encouraged. In fact, if auto-enrolment doesn't work, he suggests the next step would be to make it compulsory. "The problem with pension planning is that it takes 30 to 40 years of contributions to provide a decent income in retirement," he says. "However if people don't save they will have to continue working into old age or face a life of poverty."
Raising the state pension age to 66
The earnings link with the basic state pension is being restored from April next year, with a triple guarantee that it will be raised by the higher of earnings, prices or 2.5 per cent. However, the Government has made it clear that bringing the state pension up to a decent level needs to be paid for. It has been consulting about when to increase the state pension age to 66 and will publish its findings in the autumn.
Tom McPhail, the head of pensions research at Hargreaves Lansdown, expects the Government to push hard for this increase to happen sooner rather than later. "Every year by which the state pension is raised saves the Government about £13bn, so you can see how attractive an option it is," he says. "Going to 66 a bit sooner is a very effective way for it to balance the pension budget."
Anyone more than a few years from retirement may not like it but he predicts they will just shrug their shoulders and carry on working. "Most people's retirement plans are not so finely calibrated that if it came to it they couldn't just work an extra year."
Review of public-sector pensions
The former pensions minister, John Hutton, is chairing the review and a final report is due next spring. The study will examine areas such as the need to ensure that future pension provision is fair across the workforce and how the risks should be shared between the taxpayer and employee. It could well result in the likes of nurses, teachers and police officers paying hundreds or thousands more into their pension pots each year.
Dr Ros Altmann, an independent policy adviser, says this issue must be put under the microscope. "Taxpayers are giving public-sector workers a first-class air ticket to retirement and charging them just for an economy fare, while the taxpayers themselves have to wait for the bus," she says.
However, unions are less enthusiastic. Brendan Barber, the TUC general-secretary, believes it is a "sustained and highly political attack" from right-wing groups. "For all their ingenuity in inventing big, scary numbers that seem to show that paying modest pensions for the nation's nurses, teachers and other public servants will drive the country into imminent penury, the truth is that their pensions are perfectly affordable, not out of control and can adjust when issues such as increased longevity require it."
In June's Budget, the Coalition said it would continue with plans to raise revenue by restricting pensions tax relief, but then had reservations after listening to the concerns of the industry and employers. It has since consulted on a series of suggested reforms, including reducing the annual allowance for tax relief on pensions contributions to between £30,000 and £45,000, rather than proceed with the previous administration's idea of restricting pensions tax relief for the highest earners. Separately, there has been the suggestion of allowing early access to pension funds, but nothing concrete was announced.
So what do all these changes mean? Will it improve our retirement prospects or make it harder to guarantee a decent standard of living when we give up work? Mr McPhail believes they will help the situation.
"The Government is taking some very positive steps towards improving the state pension system and making it easier for people to provide for their own retirement," he says. "However, there is one key measure which must be done and that is to reform the basic state pension to make it simpler and more generous. When they have done that – and brought in the other changes – we'll have a much better pensions system."
What we should be doing
Just five per cent of non-retired British adults aged at least 55 feel "fully prepared" for retirement, says a report by the retirement planning specialist MGM Advantage, in the latest sign that people are not putting enough away.
Only seven million people (15 per cent) have sought financial advice from a professional, while eight per cent have consulted their bank, points out Craig Fazzini-Jones, the director of MGM Advantage. "It is worrying that so many people nearing retirement are unprepared for the financial implications of this stage of their lives."
Even those putting money away might not be saving enough to make a real long-term difference to their prospects. A general rule of thumb is to set aside half of their age as a percentage of their salary into a pension scheme. For example, those aged 30 should be tucking away at least 15 per cent.
Although the tax relief offered by pensions makes them extremely attractive for most people, it is also worth considering other investment products as well, according to Andy Gadd, head of research at the financial adviser Lighthouse Group.
"One possibility is to have a combination of tax-efficient savings vehicles, such as Individual Savings Accounts (Isas) which will enable you to put money aside while still being able to access them should the need arise."
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