As the United Kingdom slowly shows signs of emerging from the longest economic downturn in recent memory, people are beginning to look to their future and their Pension Planning and many are concerned by what they see.
In general, the UK stock market is at the same level as it was five years ago and money on deposit is generating little yield.
These factors have been reflected in recent surveys on retirement which have found that people consider themselves poorly prepared, not confident in their decisions and downgrading their expectations for life after leaving work.
As a result of the impact of the economic downturn and the general decline in livings standards, these surveys have found that pension saving is not seen as ‘salient’ or meaningful to the here and now to the vast majority. Only 16% of respondents are saving regularly with a staggering 50% not saving at all.
Those respondents who are saving are showing a tendency to park the money in cash largely through a sense of loss aversion fuelled from the dot.com crash and the 2008 economic recession. People are seemingly prepared to accept the small loss of keeping cash on deposit at interest rates below inflation rather than to make investments with a risk of a larger loss.
The impact of the increased life expectancy has the effect of pushing back the notion of retirement and, therefore, the start of serious Pension Planning. In the 2001 UK census, the population aged between 65 and 75 accounted for 8% of the total population. In the 2011 census, this age category had increased to 16% of the total population and is anticipated to continue to rise.
At the same time the government is looking to pension savings as a source of tax. As we outlined in an earlier Newsletter, from 2014-15 tax year the level of Pension Tax Relief, the annual allowance of pension savings qualifying for tax relief an individual can make, is coming down from £50,000 to £40,000.
In addition, the lifetime allowance, which sets a limit on the amount of tax-relieved pension savings an individual can build up over their lifetime, is reducing from £1.5m to £1.25m.
The most important recommendation coming out of these surveys is to make a Pension Plan with a professional financial adviser. Increased life expectancy means that it is never too late to start.
For those who are understandably reluctant to take the risk of moving cash into investments, at least make the cash work as effectively as possible. Recommendations include saving the maximum allowed each year into the Individual Savings Plan and shopping around. Banks often offer competitive rates both for those who switch bank accounts and those who switch their Individual Savings Plan.
Finally, buried in the detail of the changes to Pension Tax Relief, for those with an existing Pension Plan on 5th April 2014 but without Primary, Enhanced or Fixed Protection, the government is offering ‘Fixed Protection 2014’ that fixes the lifetime allowance at £1.5m.
However, this has to be applied for before 6th April 2014.
If you are unsure of the value of your pension savings and, therefore, whether you qualify for or need Fixed Protection 2014, it is important that you contact your scheme administrator or financial adviser.