Pension planning used to be relatively simple. You worked for a company for most of your life; you made contributions to your pension; they made contributions. Finally, at retirement, you received a pension directly related to your final salary, guaranteed.
This now seems like a golden age. Only a tiny proportion of private companies now offer such a ‘final salary’ pension scheme to new employees. Most new recruits are now put into ‘defined contribution’ schemes, where both you and your employer pay in, but the amount you eventually receive depends on the amount you have paid and the performance of your chosen investments.
Until relatively recently, the generous tax reliefs available with a pension appeared to be set in stone. However, this changed when Gordon Brown cut tax relief on dividends. His successor, Alistair Darling, subsequently revealed plans to curb higher-rate tax relief for top earners in 2009 and make company contributions taxable as a benefit-in-kind for the same group. Subsequently, the Conservative/Liberal Democrat coalition government announced increases to public sector employees’ pension contributions to help ease the wider deficit.
Today’s pensioners face a conundrum: although they are healthier and living longer, they also expect a higher standard of living at a time when pension income is becoming less certain. At the same time, although inflationary pressures have been (on a historical basis) relatively benign for most of us, retired households have tended to experience higher levels of inflation than non-retired households. This leads to one inescapable conclusion – to ensure a healthy and relatively wealthy retirement, you need to start planning early. The earlier you start, the more chance you have to boost the final value.
In order to make adequate personal pension arrangements, there are three steps you need to consider: the income you will need; when you will need it (so you know how long you have to plan); and whether you plan to keep working after that date. You will also need to assess how much income you might receive from other sources. Finally, in some circumstances, flexibility might be improved by considering other savings products alongside traditional pension plans.
Life expectancy for the UK population is higher than ever before, so any retirement plans may need to fund your lifestyle for at least 20 years. It is important to ensure you do not outlive your wealth.