It’s hard to get excited about pensions. As essential as they might be to your financial security in older age, the rules and regulations associated with these financial instruments tend to inspire confusion rather than excitement.
Working as a Financial Planner, I spent a greater than average amount of my time thinking about pensions, retirement planning and making sure people have enough money when they are older.
Whilst the typical person might find it hard to get excited about pensions and retirement planning, the subject is critical to avoiding poverty in your old age. Politicians have been gradually waking up to the reality of pensions in recent years, making important policy decisions that will affect everyone who plans to get old and retire in the future.
Because we are all as a nation getting older, it is becoming more expensive to pay for pensions. Longer life expectancy means more time spent in retirement and less time, as a proportion, spent working to pay for that retirement.
As a country, we are dealing with this by forcing people to wait until they are older before they get their hands on a State pension. The State pension age used to be 65 for men and 60 for women. By the end of this decade it will be 66 for both men and women, before moving up to age 68 in stages by the middle of the century.
In addition to taking steps to manage the cost of providing State pensions, the government wants to make the whole system much simpler. Under current rules, even pension experts occasionally have trouble predicting the level of income someone might receive from the State in retirement.
What looks set to be introduced, probably in 2014 or 2015, is a flat-rate State pension for new retirees. Those people already in receipt of their State pensions will probably have to continue receiving a mixture of incomes from various schemes, but the levels for new and existing retirees should be broadly similar.
Unlike previous attempts by government to ‘simplify’ the pensions system, these proposals actually stand a reasonably good chance of succeeding.
Working for longer before getting a State pension and making it easier to forecast what level of State pension you will receive should make overall retirement planning a much simpler affair.
When you sit down in the future to work out how much pension income you are due to receive and how much money you plan to spend in old age, there will be greater certainty about the gap between the two figures. Once you know this gap, putting in place other financial resources to close the gap becomes a bit easier.
Higher earners might have spotted that the rules this tax year on what they can contribute to a pension became a little more relaxed, although some complexity remains with the new ability to carry forward an unused annual allowance from previous tax years. The reduction at the start of the next tax year of the Lifetime Allowance for all pension funds and benefits could catch a lot of people out if they are unaware of the rules and fail to take steps to plan for it.
Whilst pensions have become a little more interesting recently as a result of all of these changes, it probably still makes sense to leave it to a Financial Planner to get excited about the subject.
