Employers shouldn’t be embarrassed about the pensions crisis – they should step forward and help!
As we pointed out in the book, the pensions crisis wasn’t caused by employers – it was created by circumstances outside their control, and tougher accounting rules have twisted the blade to make final salary pension schemes incredibly expensive. These schemes were introduced by employers as a major benefit for their staff – so it’s ironic that they have recently got some bad press for not being more pro-active.
The problem seems to be that, not surprisingly, employers are embarrassed about being forced to reduce their pensions schemes and are fearful of being accused of being the bad guys. The financial world is now hugely regulated, and this also inhibits them from doing anything else to help.
But there is a lot they can do to make a positive difference to their staff. First of all, they shouldn’t be ashamed to admit that there is a pensions crisis and that they have been forced to take the actions they have. They need to tell their staff that they now have to take responsibility for their own pensions in future and do whatever they can to help. A stance that says “let’s keep quiet and pretend that it will all go away” is actually damaging because the truth is the pensions crisis will not go away.
So what else can employers do to help? Here are some ideas:
- If they are still prepared to make pension contributions at a lower rate than before, they can make it clear to their staff what pension they can expect from this, and actively encourage additional contributions.
- If they have to cease contributions, they can inform their staff about their right to take a stakeholder pension and make it an easy and attractive choice.
- They can think about helping their staff who have a pensions shortfall to continue working past their normal retirement age if they are active, willing and still able to do their job well.
- Although they are prohibited from providing regulated financial advice, there is a huge amount they can do to make that advice easily available in the workplace.
So employers, you did a great thing in setting up pension schemes in the first place. Don’t destroy all the goodwill by being fearful now – get on the front foot and join with your staff in helping them tackle their own pensions crisis!
Changing the state pension age could make your pensions crisis even worse!
News of the pensions crisis has now reached the ears of the politicians, and a debate between the political parties about changing the state pension age is gathering steam. What are the implications for you?
In the book we describe the “pensions turbocharger”. For every year that you delay taking a pension, the amount of the pension that you eventually get can rise at a surprisingly high rate. In the example we use in the book you could increase your pension by 12% for every year you retired later (this will vary according to your own circumstances). The effect could be even more positive if you are able to earn some money and invest that in an extra pension.
So, on the surface, deferring your pension age looks as if it might have some merit. But there is a huge catch in what the politicians are now talking about – the government will get the benefit of the pensions turbocharger, not you! In fact, it’s worse than this because you currently have the right to defer your state pension age and receive an increase in your pension that reflects the turbocharger effect. By simply deferring the state pension age for everyone, the effect is that this turbocharger increase will be taken away from you.
We fully accept that a government of whatever party has to cope with the effects of the pensions crisis, and we are pleased that this is becoming a matter for public debate. As we said in the book, we believe that the old concept of a single date of retirement – where all work suddenly stops and all pensions suddenly start – is now unhelpful and needs to be replaced by a more flexible and constructive approach to the transition.
But changing the state pension age without considering the broader context is not the answer, because it will make your pensions crisis worse than it already is by reducing the amount of pension you will receive from the state.
There does need to be a national debate about the pensions crisis and state pensions, but it shouldn’t just be about saving the government money at your expense. At the very least it also needs to take into account:
- the money wasted on disincentives for low earners to pay for their own pensions;
- employment law that forces people to retire at a fixed age;
- practical issues like whether people really do want to work for longer -and whether they are able to;
- actually helping you to take control of your future rather than just making your crisis worse.
So as you can see, this debate isn’t a simple technical one. It is a huge debate that will affect everyone in some shape or form. We are keen to hear what you think – do let us know!
When will I get my State Pension?
The state retirment age has received a lot of attention in the latest round of party political conferences and we can expect this to be one of the hot topics in the run up to next year’s general election. So if you are confused about the state pension this will get you started in sorting it out.
First, you can find out what age you are currently due to qualify for the state pension by going to the calculator on the pensions service website www.pensionservice.gov.uk/state-pension/age-calculator.asp . For most of us the news is that the state pension age is likely to continue to rise as the government (whoever it is) attempts to come to terms with increasing longevity and its impact on the public purse. This just reinforces the need for you to get on top of your retirement planning and maximise the funds likely to be available to you. The message is very clear, the only person you can rely on to sort out your retirement is you – politicians of all hues are waking up to the huge gap in retirement provision but there is no easy solution and you need to make your own provisions. The book has some useful ways in which you can do that.
If you want to see if you are on track to receive the full state pension there is another calculator on the pensions service site which will get you a personalised quote. You can then review your options if you need to top it up. This is especially important for women since less than 1/3 retire on a full state pension. The only good news is there is talk about restoring the link between pensions and earnings which would be helpful though remember even a full state pension is not going to be enough for a comfortable retirement.
The politicians are also beginning to look at the huge issue of public sector pensions. If you work in the public sector you may need to start paying more attention to your pension than in the past. While any changes will only impact on future benefits and will not remove any benefits already earned you may need to keep an eye on your savings plans because public sector pensions will need to be brought in line with private sector schemes in the coming years.
Claire Brinn
Why women need to think about pensions
Not surprisingly, thinking about pensions doesn’t come top of most women’s list of priorities especially in times of recession. So why should you spend time thinking about it?
Here are some facts that might get you started:
- Women are twice as likely than men to live in poverty during their retirement, according to Age concern, They estimate that about 1.4 million female pensioners are living in poverty.
- Only 33% of women receive a full state pension because they haven’t worked for sufficient years to qualify. Even a full state pension is only £95 a week which is not enough to live on.
- Women live longer than men by five years on average so need income to last longer
If you think: “that’s not going to be me because my husband takes care of our finances”, you might want to think again. Given the number of divorces in the UK (144,220 in 2007) and the growing number of single households headed by women, you may well find yourself being forced to deal with your retirement savings whether you want to or not.
If you do want to get on the front foot, here are some tips to get you started.
- Set up your own pension and get started now, don’t put it off.
You need to get proper advice on how much to put into your pension, but you should probably be thinking about at least 10% of your income (that including any contribution your employer might be making). The main thing is to start with what you can afford – the sooner you start, the longer your fund has to grow.
- If your employer has a pension scheme, join it – don’t wait until you’ve had time to research the best funds to go into, you can always change later.
- When you get a pay increase or a bonus, consider putting some of it directly into your pension
- If you intend to have a family, budget for maintaining your pension contributions as part of the cost of the new arrival. This is one of the key times that women tend to give up their pension savings.
- If you are getting divorced, make sure you know the value of your husband’s pension. It is likely to be the second largest asset for most couples so you need to make sure you understand it and you know what options there are. The pension’s advisory service can help and a good solicitor will talk you through what is relevant in your case.
The main thing is to realise that your retirement savings are your responsibility and to get started as soon as you can!
Report: How can housing support retirement?
The Pensions Policy Institute have just published a report – “Retirement income and assets: how can housing support retirement?”. The short answer is: “only a bit”.
We discuss this in Myth 5: “My house is my pension” in chapter 3 of the book. Although housing assets are actually larger than pension assets for the average household in the UK, this is a bit of an illusion because you can’t turn all your housing assets into extra income – you have got to live somewhere.
The most useful conclusions of the research are that:
- The main positive impact that housing has on retirement is that your costs can go down because you have paid off your mortgage. This can reduce living costs by 30% for a single person and 40% for a married couple.
- You might be able to release some of your equity by moving to a smaller house or buying a special “equity release” financial product – but both options have costs attached.
- Because you can only release a proportion of your equity and pensions are quite expensive to buy, it’s best to think of equity release as a way of boosting cash for immediate requirements rather than for increasing your pension.
- As you would expect, the distribution of housing wealth is uneven, and many people in retirement have low value homes that can’t really generate much at all in terms of releasing equity.
The report discusses other issues like using housing equity to fund the possible costs of disability, and extracting more value from property by renting rooms or investing in a second property. You can download a copy from http://tinyurl.com/ntayuz .
Our approach, which is hinted at several times in the report, is that it’s probably better to take a wider view rather than focus on the value of your house as some sort of magic bullet. You can’t separate your housing assets from your lifestyle, because you need to live somewhere. So you need to think about your expected lifestyle in retirement and plan for it, while taking housing issues into account.
Look for as many ways as you can to reduce your pension gap. If you conclude that releasing some house equity now is the best option, that’s fine (but make sure you get advice on equity release plans). If you can keep some of your house equity stashed away for future emergency use, then so much the better.
Eating your pension “elephant”
Some problems can look so big and complicated that it’s difficult to know where to start – so you don’t start at all. It’s easy for the pensions crisis to look like this: your pension seems to be under attack from all sides, the technical jargon is hard to follow and there doesn’t seem to be an obvious entry point.
There is an old question-and-answer proverb. Question: “How do you eat an elephant?” Answer: “One bite at a time”. Fortunately there are a couple of easy bites you can take. They require very little effort, but they get you on track towards getting control of your pension and retirement.
First, decide to pay more active attention to pensions matters. When you get a letter from your company or pension provider, treat it as a puzzle that you are determined to crack. You can use this website and our book to decode the technical language that is inevitably contained in these letters, and start to understand what your pension entitlements really are. This is particularly important if you are being asked to make some sort of decision – for example whether to make contributions and whether you are prepared to modify your pension benefits.
Second, get hold of a piece of paper and a pen, and start writing down the names of all the companies you have worked for in the past (whether or not you think you had a pension). If you can remember, put in the years you worked for them. Also, try and remember whether you ever bought any pensions or savings policies in the past and try and write down what information you can. You don’t need to complete this exercise at one sitting – the important (and easy) thing is to get started. Having started the process, it acts like a prompt to your memory and over time you naturally remember more details. Once you have done this as best you can, you are then in a much stronger position to turn detective and track down what you are entitled to.
Both of these activities are simple, quick and easy. By undertaking them, you are taking the first bites out of your pensions crisis and taking responsibility for your own retirement. You are beginning to eat your pension elephant.
News: more pension schemes set to close
BBC News has reported the latest Watson Wyatt survey which suggests that more final-salary schemes, many of whom have already closed to new members, are considering reducing future benefits for existing members: read the full article here.
As more and more employers react to the pensions crisis by reducing benefits, the continuing trend underlines the importance of taking responsibility for your own pension. You can no longer afford to rely on someone else to make sure your retirement expectations will be met – not even if you are in a generous final salary scheme.
Reduce your pension gap – without paying money
Because of the pensions crisis, more and more people have a pension gap – the difference between the income they would like in retirement and the pension they will actually get from their pensions and savings. At first glance, it looks as if the only way to reduce this gap is to start paying more money into pensions.
But you can actually start reducing your pension gap without having to spend any money at all. You can do this by looking separately at the two elements that make up the gap – how much money you will need in retirement, and how much pension you have already built up.
The first of these elements is the income that you believe you want in retirement. Is this just an arbitrary number you have plucked out of the air? If so, it might be worth working out how much you will actually need, taking into account the changes of lifestyle that will occur after retirement. You can then look at decisions that affect how much you need – for example, the size of house that you decide to maintain, and what else you plan to spend money on.
Thinking more explicitly about your retirement lifestyle might lead you to reduce your estimate of what income you may need. There is also a chance that you increase your estimate – but if that’s the case it is worth allowing for this sooner rather than later.
On the other side of the gap are your existing pensions from a variety of different sources – the government, past and current employers, personal pensions, and other savings. Over time there are many options and decisions that you need to take, and it is very easy to neglect these because of the intimidating complexity of the language of pensions. But if you put a small amount of effort into making positive choices, you can maximise your existing pensions and reduce your pension gap – without spending any money.
The book expands on this in a fair amount of detail, but here are some examples:
- Making sure you maintain membership of company pensions schemes that you are eligible for;
- Thinking about pension rights as well as salary when changing jobs;
- Keeping track of old pensions, whether they are company or personal pensions;
- Planning to retire later so that you can “turbo-charge” your pension;
- Using all the tax reliefs available on pensions and savings;
- Exercising any favourable options that you may have on any of your pensions.
The combined impact of looking at all these possibilities can make quite a difference to your pension gap. And once it it has been reduced, the prospect of taking out any extra pensions can look a lot more manageable.
It’s all too complicated!
We have to sympathise on this one – not because pensions are inherently complicated, but because all the rules, language, regulations and technicalities surrounding pensions have turned a simple idea into something that can look very messy and hard to understand.
The basic idea of a pension is simple. You (or someone on your behalf) puts money away during your working life, so that when you retire you will have a pension to live on instead of your salary. That’s how it all works –whether it is a state pension, company pension, personal pension or whatever.
Much of the complexity is caused because pensions attract tax relief. The government is paranoid about this: on the one hand it wants to incentivise people to take out pensions; but on the other can’t stand it when people start taking advantage of the tax incentives. The result is almost continual chopping and changing of the rules that doesn’t really help anyone.
There is another type of complexity which is to do with the language of pensions and how they work. If you want to get the most out of your pensions, it’s worth making an effort to learn the basics – ‘just enough’ to make good decisions. That’s where we have pitched the book – to give you ‘just enough’ information so that you can take the right actions to reduce your pensions gap. If you need more detail, you will be to find links to it on this website once it is completed.
If it still too much too cope with (and this is bound to happen sometimes), we strongly suggest that you get professional advice.
What is the best age to think about your pension?
The original idea for writing the book came from looking at the situation for people in their 50’s who were begining to think more actively about planning for retirement – and were also getting concerned about the modest amount of pension that they had built up.
In practice, the content is relevant across a broad spectrum of ages. If you want to start planning for retirement, you need to be aware of the issues and options for people already retired. You also need to be aware of some of the choices you will have when you retire and take a pension. And if you are a long way off retirement, you have a lot of scope to change things later by taking small actions now – but you need to know what those actions might be. So although the book has been structured around the impact of pensions on different age ranges, most of the content will be valuable in some way to everyone.
As we go through our working lives, we get to hear snippets of information about pensions – for example when we get a new job. But it’s very difficult to evaluate the decisions we make at these points unless we have a rough idea of the overall context, how this decison now will affect my pension and retirement later on. We were taught Maths and English at school, but we were not taught about pensions.
The fact is that although there is a huge mountain of detailed information about pensions out there, the mountain is so big that it is very difficult to make sense of. As a result few of us, at any age, really understand pensions all that well. Hopefully this book will go some way by providing an understandable routemap for climbing the pensions mountain.
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