Personal Pension Accounts

Future Changes

The idea is that everyone will automatically join the new scheme in 2012 unless they opt-out. In theory, this is a good idea, because it will force every one to start a pension, if they do not already have one. The problem is that for large numbers of lower paid employees, the benefit will be reduced because the pension they eventually receive will offset the pension credit they would receive if they didn’t have a pension (other than the basic state one) at all.

Pensions “guru” Steve Bee reports that in some cases, those going into the personal account system could have most or all of their expected retirement income from the new scheme offset by a loss of pension credit. Unfortunately these will be the poorest workers. The government is certainly aware of this, but intends proceeding in any event because people are not actually forced to auto-enrol and the scheme will be suitable “for most people”.

This clearly highlights the importance of independent financial advice – in this case independent not just of insurance companies, but also the government – so that individuals can fully understand the way they will be affected by the new regime.

But it also emphasises the importance of personal planning for retirement generally. Whatever we may think of the proposed personal accounts – and however much we may criticise the government’s “£5 billion-a-year-raid” on pension funds, when it took away the ability of pension fund administrators to reclaim the tax deducted from dividends on UK shares – there is no doubt that most people have inadequate pension provision.

Unless you are a politician or civil servant, it is unlikely that you are still the member of a “final salary” scheme; one that links your pension to your earnings in the run-up to retirement. Most of these schemes have been closed since the turn of the century.

So the income you receive in retirement will depend largely on how much you (and your employer, if you have one) contribute during your career, how much investment return you achieve (after charges) and the annuity rate available to you when you finally give up work.

Investment performance has certainly picked up over the past four years after a disastrous start to the decade, but the FTSE100 has still not quite recovered its heights of 1999. More importantly, annuity rates have fallen dramatically since the 1990s, largely due to increased longevity and long-term low interest rates.

It is therefore essential regularly to check your pension arrangements to ensure that:

• You are investing enough – especially bearing in mind that you can receive tax relief on your entire salary up to £225,000 for 2007/8 (and rising next year); and

• Your investment strategy matches the timeframe during which you expect to retire.

It is also worth considering that traditional pensions are not the only way to save for retirement; Individual Savings Accounts (ISAs) also benefit from “tax free” status, and while there is no relief on contributions, income and capital withdrawals are also free of tax. Other investments can offer tax-efficient ways of investing although some will be accompanied by higher risk and should only be used with proper advice.

If you require any further information about the services that we provide or would like to review your financial planning position, please contact us

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