It’s a big Pensions news day….but are the reasons good?

As you will have seen from the headlines today, it’s a big pensions news day, facing up to some of the realities of funding future pension benefits, although many will have their own view on whether this is good or bad.

In general, the UK public is living longer than its predecessors and this is putting pressure on pension funds to keep paying for longer. Taking this and other factors into account, it is not suprising that the headlines feature the following headlines:

‘Plan to axe fixed retirement age’ (BBC) confirming that employers will no longer be able to force employees to retire at 65 from October 2011. Many will welcome this opportunity to continue to contribute to the UK workforce for as long as possible.

Also,

‘Warning on local councils pensions’ (BBC) confirming that the liabilities of the Local Government Pensions Scheme (LGPS) were rising and that action was needed to control the future situation. The proposals include increasing employee contributions, increasing the retirement age and possibly adjusting the benefits paid out.

This news, coupled with the rise in proposed State pension benefits age, the switch in increases to the Consumer Price Index (CPI) from Retail Price Index (RPI) clearly suggests the pressure that pension funds are seeing as time and liabilities move forward.

If you plan to review your pension planning in light of these proposals and changes then seek Independent Financial Advice. This is not designed to provide individual advice. Churchouse Financial Planning Limited is a Chartered Financial Planner and Independent Financial Adviser based in Surrey. They can be contacted on 01483 578800

Keith Churchouse Director of Churchouse Financial Planning Limited

Churchouse Financial Planning Limited is authorised and regulated by the Financial Services Authority. No individual advice is provided in this comment and you should seek independent financial advice for your own needs

Do increases in pensions really matter?

The straight answer is yes and this is highly topical at the moment with the governments focus on the way that pensions could increase in the future. I am sure you will have seen the debate about increasing in CPI (the Consumer Price Index) instead of RPI (the Retail Price Index) where you have control of this decision when you buy an annuity, you should consider this carefully. If you are taking independent advice, then look at the options available to you from across the market. This is usually means using your Open Market Option (OMO) and can make a significant effect on the amount you finally receive. With maximum retirement ages increasing to 77 from 75 in the last budget and the expectation of further increases, it is expected that many will live longer in retirement due to better overall welfare.

Bearing in mind that many will live for another 20 years in retirement, then the effects of inflation as it compounds over the years can make a real effect on the purchasing power of your pension income. A recent survey showed that inflation had seen a compound rate increase of 23% over the last 10 years (Source: Joseph Rowntree Foundation Survey).  They also noted the following statistics: food prices (up 37%), bus fares (up 59%), and council tax (up 67%). It is also important to note that many believe that we have been in a low inflation environment for the last 5 years, you can see the perspective of this issue.

Many final salary (Defined Benefit) scheme benefits increase in deferred accrual and in payment using an RPI rate, although check the detail on your scheme as this is not guranteed. Any change to CPI could mean there is a real potential that values of pensions or their purchasing power in payment will fall over time. Don’t forget LPI (the Limited Price Index (usually RPI up to a maximum of 5%)) which is another option that some pension Trustees use in accruing pension benefits.  The option used on any scheme that you have will be detailed in your scheme handbook, although the Trustees may want to notify you of changes into the future.

Whatever happens, you can see that it is important to look at this issue. If the situation does not meet with your expectations (also noting any tax free cash (TFC) available) then you may want to plan for this by undertaking financial planning and saving accordingly into the pension, possibly via AVC’s (Additional Voluntary Contributions) or Added Years (if available, allows extra accrual of years within a Final Salary Scheme) or other alternatives, such as stakeholder pensions or ISA’s if you prefer.

This is not designed as individual advice and you should speak to an independent financial adviser about your individual requirements.

Keith Churchouse Director of Churchouse Financial Planning Limited

Churchouse Financial Planning Limited is authorised and regulated by the Financial Services Authority. No individual advice is provided in this comment and you should seek independent financial advice for your own needs