The Future of Pensions and Retirement
What is clear is that the pensions of the future will look nothing like those enjoyed by previous generations. Those that have retired in the past twenty years have arguably had the best pension outcomes but the future does not look bright.
There are several factors working against better pension payouts at retirement. On the brighter side, we are all living longer so pension pots have to fund an ever increasing period of time before we pass over to `the other side`. Secondly, the number of productive workers in society, that is those that pay taxes to fund social welfare, benefits and state pension, is reducing as a proportion of the population. Thirdly, world economies have taken a heavy hit over the past few years and growth forecasts mean that growth is unlikely to reach levels experienced in the 90`s and early 2000`s for some years.
Pension plans come in two basic forms: employer sponsored or self invested options.
Many private sector pension schemes used to be based on percentage of final salary pro rata for the number of years worked. As investment returns and government changes to dividend tax relief have changed these have largely become unsupportable and have almost disappeared as an option. Most corporate schemes are now defined as `money purchase` schemes where an invested pot grows over time until it is cashed in to buy an annuity.
There are still tax advantages to making additional voluntary contributions to company pension plans. The rules on regulation of pension plans has stiffened considerably since the Maxwell debacle and even if underfunded funds should be ring fenced and secure.
But a recent government change to reduce the cost of state pension has highlighted the need for individuals to improve their saving for retirement. State pension will now not be paid until age 68 and despite attempts to simplify and link to earnings, a link to consumer price inflation means that the state system will provide only a basic income.
Self Invested Pension Schemes have become a popular way for those with spare cash to invest in saving for the future. These allow a high degree of self management of investments and a range of assets, including some property, can be held within the plan. These are ideal for the informed investor and there are also options for managed plans with some providers.
But saving within the pension regime usually means access to any of the money is highly restricted until you are over 55. Not surprisingly, therefore, many have seen investing in property through buy to let residential schemes as a way to grow a fund for the future. Whilst not attracting the tax advantages afforded to pension plans investing in property has been seen by many as a way to get capital growth with rental income to cover borrowing costs.
But the key to successful pension planning is to hold a wide variety of investments. No one can predict the winners or losers of the future or what the landscape will truly look like in twenty or thirty year`s time. Therefore, accept some rough with the smooth and aim or an annual growth rate on investments of a few percentage points above inflation.
As always with any long term investment saving a little early beats saving a lot later in life. The old adage of saving 20% of income in your twenties, 30% in your thirties and so on is still valid though few can truly afford to do that in these tough times. There always has to be a balance between money saving money spending options and pensions tend to come low down the priority list when cash is tight.
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As time goes by, you are going to want to make adjustments to your life insurance. You are going to use the same thought process as when you first purchased your policy. What has changed that requires a change in your policy. Maybe your kids grew up, there is less household income, or maybe you have less expenses. Whatever the case is, adjustments to your policy are inevitable and needed.