by Peter Harrison, Chartered Financial Planner, Manning and Company
You may have seen the recent TV campaign about company pension schemes, and be wondering how the changes might affect you as an employee.
Let’s start with the thought that pensions are just a long-term savings scheme. Most people, when they retire (and some people aspire to give up work as soon as possible!) would like to maintain the standard of living they had while they were working. But, with people generally living a lot longer these days, this takes a large pot of money.
State pensions help, and there is the possibility that these will be set at a standard level in the next few years (as long as sufficient National Insurance contributions have been paid). But the state pension age is rising, for men and women: you will have to be aged 66 by October 2020 before you are eligible for anything. By 2046, you will probably have to wait until age 68. And even then, the pension you receive is unlikely to keep you in the style to which you have become accustomed! The current level, assuming a full record of National Insurance contributions, is a little over £107 per week.
If this is not enough to live on, there may be some benefits available; but, given the uncertain nature of these, putting aside money to fund your retirement must be worth serious consideration!
Some jobs come with pensions attached – the best schemes are ‘final salary’ pension schemes – that is, the pension is set as a proportion of your earnings. These ‘guaranteed benefits’ are well worth having but, because they are very expensive to fund, they are becoming very rare these days. Even with such a scheme in place, many people find that they have not been in the same job long enough to have a good pension at retirement.
The government is also concerned: they would like to cut the benefits bill and it is clear that a lot of people, if they save for retirement at all, are saving far too little. There are many reasons for our lack of interest – perhaps there is no money left over at the end of the month, or there may be a concern that the savings are insecure and may disappear into a pension company’s coffers. Good management and low charges are, of course, important; but regular checks and reviews are the best way to go, so corrective action can be taken if things are not going as planned.
From October 2012, the government is making all employees (with some exceptions – in particular those earning under £8105 p.a or aged 20 or under) join a pension scheme, to which their employer must contribute – known as ‘auto-enrolment’. Large companies will be first to set this up, with smaller companies following over the next few years. Contributions are also small to start with – 2% of pay in 2012/13 (of which the company pays 1% and tax relief is another 0.2%, so employees pay 0.8%) but this will rise to a total of 8% by 2018 (of which the employer pays 3%).
Security is guaranteed; but of course, since this money is earmarked for retirement, there are rules about accessing your fund – for example, under current legislation you can’t draw it until you are at least 55 and, even then, the majority of the money must be paid as an income for life. But that is the reason for saving the money – and at least you can get tax relief on the money you invest.
From an employer’s point of view, a suitable pension scheme can be very easy to establish. It does not have to cost too much and a good pension scheme is a great incentive for happy and loyal staff.