Pensions are they still worth it

As the great economist John Maynard Keynes once observed; ‘the way out of recession is to spend your way out of it’ (Enter Gordon Brown); but, we are all battening down the hatches and saving more, which is bad for a recovery in the economy, but good for our pensions and future income in retirement requirements.

Recent research shows that due to the collapse of World investment markets, the purchasing power of our future pensions have been reduced, and the amount of money being put into pensions for employees needs to double.

It is an oft touted fact that in 2011, the first of the ‘Baby Boomers’ reach the age of 65. By 2015 there will be more people retiring than indigenous workers entering the workforce. The Old Age Pensions Act was passed in August 1908 and the first payments were made on 1st January 1909. So Happy Birthday Old Age Pension, you have reached your first century.

The Basic State Pension is now £90.70 for a single person and £145.05 for a couple, and there are now 12 million people drawing state pensions, compared to 528,000 when it was first introduced. Take a second to look at those figures, and ask yourself if you could live on that income, without any other form of income being received. A recent study by Friends Provident, surveying 3056 people, showed that the average person believed they would need a minimum of £832 per month income, to live on in retirement, or broadly, double the current state pension.

Of the same people 1029 expected to work longer than they wished due to a shortfall in retirement income; and 29% said they would save more in the run up to retirement. Pension planning is not the be all and end all of arranging for a continuance of income when you retire, and we would fully expect clients to have a range of options available to them to fund their retirement income needs.

These would include other investments, bank interest, rental income from additional properties, or even releasing equity from their own properties. However, pension planning is simple to understand; easy to arrange and very tax efficient.

You can save regularly or you can make payments singularly, as and when cash flow/income permits. You might be able to join a scheme sponsored by your employer, and receive additional contributions into your scheme - as well as those made by yourself, and of course the tax man also contributes to your scheme via the receipt of tax relief on your contributions. You may, if you wish, opt for self investment via your scheme, where you, or your appointed investment manager, take control of your schemes investment strategy, which could include the purchase of commercial property.

So there are plenty of alternative options available to assist you in planning for your future.

We all need to diligently save more, and the ‘Baby Boomers’ may well be starting to wish they had started planning earlier. Are pensions still worth it? Yes, they are.

Something, is better than nothing, and remember the State Scheme is able to provide only a foundation of support in retirement, it is not, and never was meant to fund a luxurious retirement. Any additional income, created from a tax efficient structure will help you plan your retirement, and hopefully make it arrive a little earlier, and last as long as you do.

An important point to consider for clients around the age of 50. It is now only just over a year until the minimum retirement age in most circumstances increases to 55. Some clients will aspire to retirement at 50 & there is an opportunity to review current arrangements both in terms of the target date for retirement and funding levels.

It is important that clients are aware of the change, particularly those reaching 50 just after April 2010 as they will now have to wait another 5 years to draw any pension benefits as the change is not staggered. They may still want to stop work at 50 but will have to find (and fund) non pension assets to cover the gap.

The other category of clients who face problems are those who have recently started or are just about to start a phased drawdown in their early 50's. They will find themselves in a situation where they can take tax free cash and income for a couple of years but will then face a gap from April 2010 until they hit age 55 before any more uncrystalised funds can be vested.

These are important facts to be considered when planning for early retirement so it is even more important to seek Independent Advice from a pensions specialist.