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

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."

Other issues

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.

Conclusion

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."

Independent Partners: 10 top tips for retirement. Get your free guide here

Voices
voices
News
general electionThis quiz matches undecided voters with the best party for them
Arts and Entertainment
Keira Knightley and Matthew Macfadyen starred in the big screen adaptation of Austen's novel in 2005
tvStar says studios are forcing actors to get buff for period roles
News
Prince William and his wife Catherine, Duchess of Cambridge show their newly-born daughter, their second child, to the media outside the Lindo Wing at St Mary's Hospital in central London, on 2 May 2015.
news
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Trainee Consultant - Surrey/ South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    Ashdown Group: Trainee Consultant - Surrey / South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Recruitment Genius: Senior SEO Executive

    £24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

    Day In a Page

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before