Once upon a time you would work for the same firm all your working life, pay into a company pension scheme and retire at age 65 with an index linked pension of two thirds of your final salary.
These were the wonderful days of the Final Salary pension schemes that provided employees with a secure and comfortable retirement. Unfortunately, regulatory changes, disappointing investment returns and increased life expectancy have had a devastating effect on final salary schemes, virtually bringing about the demise of these types of pensions. It’s quite ironic that changes in regulation introduced to protect employee’s pensions are one of the contributing factors that have caused employers to cease offering these schemes. Employers are closing these pension schemes at a phenomenal rate leaving employees faced with saving into Personal Pension schemes where there is no guarantee of the pension benefits at retirement.
So in this brave new pension world, how do employees save to fund a secure and comfortable retirement? The basic answer is with great difficulty, individuals now save into Personal Pensions but cannot save a sufficient amount into this type of arrangement to match the benefits of a final salary scheme. This is because in personal pensions the investment risk is transferred to the individual and they are at the mercy of global stock markets and annuity rates at retirement, which ultimately determines how much they will retire on. Also, an employer will usually pay a much lower amount into a personal pension for an employee than is typically paid into a final salary scheme.
So if we are unlikely to build sufficient savings in a personal pension to fund our retirement what should we do? I think the answer lies in accepting that retirement will be very different to how it has been for millions of workers in the past. Retirement Planning should no longer been seen as a one size fits all, it should be seen as a jigsaw. I think we now have to look to many ways of funding retirement, as well as pensions, individuals can also utilise funds built up in ISAs to help fund retirement and consider unlocking capital in their home by downsizing. Some people will go on to invest in a second property, which can provide a useful income stream in retirement. Many people these days also inherit from parents, although with the prospect of funding long term care this should not be relied upon. We may have to accept that we will work for longer before retiring, with many of us having to wait until age 67 before getting our hands on a state pension. It is also true there is a growing trend to work part-time in retirement to supplement pension income.
Whatever path you take, seeking the expertise of an Independent Financial Planner is considered more important than ever these days. Here a planner can take a holistic approach, looking at an individual’s full circumstances before guiding you to the best course of action. Once a retirement plan is put in place it can’t be considered job done. A plan needs reviewing at regular intervals, usually at least yearly as an individual’s circumstances may change. For example a change of job with a different income level, receipt of an inheritance, legislative changes or becoming parents can all mean a change of circumstances, which will have repercussions for the retirement plan. For these reasons and many more it is vital to regularly review to ensure the retirement plan evolves and adapts over an individual’s working lifetime.
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