Every day we pick up the papers or watch the news to see yet another story or headline concerning our retirement or pensions in general. The whole idea of individuals working for most of their lives only to retire on income that is well below what they would like or indeed can afford to retire on.
As you can see from the headlines, there does not appear any good news on the horizon, in fact the opposite appears to be true, most individuals in the UK are not going to enjoy the happy retirement that they may have looked forward to in the past. We would even be as bold as to suggest that our generation will never be able to enjoy the same benefits as our parents from pension schemes because so many things have fundamentally changed especially regarding company pension provision and the affordability thereof.
All we ask of you is to take a minute to reflect on your own circumstances and ask two basic questions:
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- Am I happy with my current situation regarding my financial future i.e. when I retire for example?
- Are there any alternatives to the standard retirement planning i.e. funding a pension?
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Most clients we meet fall into one of two categories, they either have a final salary pensions, such as Civil Service, Teachers, Police for example (in fact the majority of the bigger employers may offer such schemes) OR they may have a personal pension type arrangement.
We will give you a very simplistic overview to try and explain the differences but as you can appreciate this is information only to give you a better grasp of your current pension but as this information is only a general overview, you should take professional advice – see our “Your Pensions isn’t working” section on our Home Page.
A final Salary Pension scheme (very simplistically) is where after making a pension contribution through your salary usually on a percentage basis i.e. 5% of your salary and your employer also makes a contribution (amount unspecified) to ensure that there is sufficient funds within your pension when you retire so you can relax and enjoy the comfortable retirement you have longed for!
This has always been seen as a sort of reward for giving your service to the company through out your working life. You can probably remember the conversation when the employer sold you the benefits of joining them…join us and you also have a “good” pension as well!! What people do not understand is that the employer has the responsibility and duty to ensure this happens! (Whatever the cost) These contributions are in exchange for a fraction of your final salary.
So perhaps you may get 1/80 for each year of membership so if you were a member for 40 years…..you would be entitled to 40/80th i.e. ½.
So if your final salary was £40,000 then you would get £20,000.
NB. This is only intended to give you a brief understanding of how things work in the big wide world but as stated earlier is very simplistic and there is much more to the subject matter than we can discuss here.
Unfortunately, in Today’s world these employers can no longer afford to fund these schemes and they have become major liabilities, in fact most of these schemes have such major deficits or “black-holes” in their plans that they are trying to close most schemes.
Obviously, the employer would find it very hard to close existing scheme outright as existing members would be up in arms to say the least or would go on strike for example in protest as you may have seen already on the news and at least now hopefully you can begin to see why this is happening irrespective of whether you are actually a member of a final salary scheme or not.
So as a way of lowering this liability most schemes have closed its membership to new members whilst this is understandable course of action given the severity of the situation.
This in itself is not sufficient so you may find a lot of schemes having to change some of the benefits such as longer service, higher contribution levels, reduced benefits etc, which basically means that many clients may not achieve what they were expecting on retirement and understandably may have ongoing disagreements concerning their pensions as this massive problem is not going to go away.
So hopefully you realize that nothing stays the same and maybe you should review your pension and options. Do not also forget that if you do not or cannot achieve the full quota i.e. 40 years service, then the amount of income on retirement would reduce. 20 years on the above example gives a ¼ as opposed to ½. Lastly, you should explore the outcome if you have numerous schemes from different employers due to career progression, promotion, redundancy, employers no longer being in business to name a few situations, as this would have drastic effect on your income on retirement!
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Many of the population do not even have the relative comfort of a Final Salary Pension and we believe these clients are probably in a worse position, as they often have no idea what their pension will give them on retirement.
Again, very simplistically most individuals may have a personal pension which is a completely different animal to the previous example in that the proceeds are purely down to what you put in over the years.
To put it simply, imagine your pension was a simple building society account and you have to put enough money away each month until retirement so that the total amount in your building society was large enough to live off the interest.
This analogy hits the nail on the head for most people as there are great similarities in that what income you can enjoy on retirement is down 100% to what you have accumulated. The nuts and bolts we can leave to another time but you need to get a grip of these basics as your retirement depends on it!
So you want to live off £20,000 interest pa?
How much would you need in this fictitious building society account?
£50000, £100,000 or more?
£400,000 @ 5%=£20000 pa………Shocking but mathematically true!!
Now If you were to review your annual statement to see how close you are to the above example…..most clients fall drastically short and whilst we appreciate the example is a little crude and basic, we feel you may get the point that we are trying to make and therefore our aim of increasing your understanding is achieved.
If you only have £40,000 in the kitty, how can you obtain an income of £20,000 per year?
Reality check your own situation and hopefully we can be of assistance to help to get back on track