With the burgeoning pension crisis in the United Kingdom, it is vital that we get to better understand the world of pensions.
The reality is that unless we take proactive responsibility for our retirement planning early on, there is a likelihood that one would have to make a some very different lifestyle choices once hitting 65.
On the positive it is not all gloom and doom, there are measures that can be taken to avoid such an outcome. Here we will discuss going back to the basics of pensions and at how financial advisor can help add value to your retirement.
What is a pension?
In layman terms, a pension is simply a method of putting away money for now, so that the amount saved will replace the income you lost from your salary when you decided to retire.
One should look at retirement as the longest holiday you will have and from there gauge how much money you will need to save.
In the UK, the government is keen to get you saving for retirement and actively encourages and supports you by offering tax incentives to reward savings. Your pension income is normally made up of several sources, the state is usually one of them.
Currently the states basic pension £159.55 a week, which doesn’t get you particularly far.
Therefore, those who are determined to retire early will focus on savings and seek the financial advice they need to take control of their financial future.
There are two main Pension Schemes
Defined Benefit Schemes
A Defined-benefit schemes usually provide a pension based on income: The number of years in which you’ve been a member of the scheme – known as ‘pensionable service’; Your pensionable earnings – this could be your salary at retirement (known as ‘final salary’), or salary averaged over a career (‘career average’), or some other formula, and the proportion of those earnings you receive as a pension for each year of membership – this is called the accrual rate and some commonly used rates are 1/60th or 1/80th of your pensionable earnings for each year of pensionable service
These schemes are run by trustees who look after the interests of the scheme’s members. The employer contributes to the scheme and is responsible for ensuring there is enough money at the time you retire to pay your pension.
Defined ContributionSchemes
Defined contribution pensions build up a pension fund using your contributions and your employer’s contributions (if applicable) plus investment returns and tax relief.
If you’re a member of the scheme through your workplace, then your employer usually deducts your contributions from your salary before it is taxed. If you’ve set the scheme up for yourself, you arrange the contributions yourself.
You will be offered a retirement income based on your fund, but you don’t have to take this. It should not be forgotten that you have the option to shop around for a better rate, or even consider using ‘income drawdown’.
The challenges facing pensions
Currently there are not enough people saving towards retirement. Research carried out in September 2010 by Aviva estimates there will be a £10,300 per annum shortfall for all those retiring over the next 40 years.
This equates to a mind-blowing £317,000,000,000 per annum. There are many reasons as to why people aren’t saving, these include; they believe that the state will provide for them; they think retirement is a long way off; people find pensions complex and difficult to understand and finally people don’t have as much money so saving is much more difficult.
There is also the added bonus of pensions being increasingly in the news! The final salary schemes collapse and large companies with huge deficits dissuading many people to shy away from saving into a pension.
The effects of an aging demographic
With the UK’s ageing population ever increasing, and the working population decreasing it is beginning to have a large strain on the UK pension provisions.
As the cost of providing for pension provisions becomes the responsibility of less and less taxpays, who are now having to support the growing population of retires who are living for longer, puts a substantial weight on the shoulders of the young professionals who are having to support the mass of pensioners.
How can advisers help?
There is no denying that people have considerably less confidence in pension, however pensions remain the best way to securely save for your financial future.
- A financial advisor should help in numerous ways:
- encouraging clients to act now
- educating clients on the fundamentals and explaining that pensions are not as complicated as they think
- outlining what retirement will look like if their plan should fail and finally reinstalling confidence in pensions.
An advisers main aim it is to have clients reach their long-term financial objectives, it is their responsibility to encourage greater engagement in this vital area of financial planning and to promote a wider fundamental shift in the attitude of working age people towards savings and pensions.
Failure to do this will, unfortunately, mean that more and more individuals will face an impoverished retirement and that further pressure will be put unnecessarily on the already overstretched State and younger generation.