Pensions - a necessary evil?

When I was asked to write this brief article for Pension Awareness Week, I thought I would enter “what is a pension” into my search browser and I was amazed that I received 349 million articles. No wonder pensions are considered to be a necessary evil by some and with others, it is simply a love-hate relationship due to their perceived complexity.

?But why is that? I will put together an explanation of the positive benefits that a pension can offer and I welcome your comments and thoughts as to whether you agree or disagree with me, so please don’t hold back.

?The changes to pension legislation introduced in April 2015, known as Pension Freedoms, has raised a range of issues to be addressed by clients, advisers and providers alike.

?There is a need for all of us to provide an income for life after work and that has become increasingly important as our working habits and our standard of living expectations have changed over time. Due to a healthier lifestyle overall, the average life expectancy continues to rise which means we need to prepare for a longer retirement and perhaps a different investment strategy.

?With the pressures and distractions of everyday life, sometimes planning ahead for our retirement is not our sole focus and as a result, many of us are not saving enough into a pension, or preparing early enough which can mean that we will experience an income shortfall in retirement. This is a major cause for concern not only for financial planners, but for the regulator and the Government too.?

?Trying to strike the right balance between positive nudges and behavioural biases, is never going to be easy, but can be addressed with increased transparency, clear communication and improved education.

?We have to look at the main pillars of retirement income which could be a combination of the state pension, final salary pension, workplace pension or personal pension amongst other arrangements. However, due to the changing pattern of employment – and some research suggests that we could change jobs 10 times during our working life, meaning a lot of deferred workplace pension pots.

?The frequency of changing jobs can mean that an income shortfall or deficit is being created in retirement which will need to be tackled, to ensure that we have the dignified retirement and standard of living that we have worked so hard for and earned the right to enjoy.

?I find that by trying to understand the answers to the following questions, it can act as a call to action and focus the mind on the fact that, there could be a potential income problem in retirement.

?·????????What problems could you foresee if you did not have the desired level of income to meet your required standard of living and objectives in retirement?

·????????What affect will a lower income have on your ability to go on holiday, change your car, maintain the home, look after the grandchildren/family or continue with your hobbies?

·????????After working for so many years, how do you feel about that?

You can contribute the higher of ￡3,600 per year or 100% of your net relevant earnings each tax year. This means that even if you are not working you can contribute ￡2,880 per year and still receive an additional ￡720 from the HMRC in the form of tax relief.

?There is an Annual Allowance of ￡40,000 per year, meaning you can contribute up to this amount each tax year and qualify for tax relief whether you pay 20%, 40% or 45% income tax. This means that if you contribute ￡100 per month, you will receive a further ￡25 from the HMRC if you are a basic rate taxpayer, so ￡125 will get invested into your pension each month.??

?For those that have not maximised their pension contributions, there is also the opportunity to “carry forward” unused contribution for up to the three previous tax years, which will also qualify for tax relief.?

?The favourable tax treatment of pension funds means that they should grow faster than equivalent taxable investment funds.

Another key factor to consider under Pension Freedoms is the option to nominate beneficiaries to receive the death benefits so your legacy can continue and remain intact. Generally, these can be passed on without being included in your estate for inheritance tax purposes.

?The key age to remember is 75. If you die before your 75th birthday, then any pension can be passed on tax-free. Your beneficiaries can spend it when they want without incurring a tax bill as long as they have been nominated within two years of death.?But, after your 75th birthday, there can be tax implications for your beneficiaries, although the eventual bill may still be lower than it would be on money outside of a pension.

?The pension world of regulation and rules is ever-changing and underscores the importance of working with professionally qualified financial planners.

?The minimum pension age is rising from age 55 to age 57 in 2028 and with all change, there will be winners and losers.

?By working with your trusted financial planner, you will be able to paint a picture of the standard of living you would like in retirement, to establish where you are currently on that financial journey, to identify and shortfalls and to put a plan together to address any shortfalls and to maximise all the allowances you are entitled to – as once they are gone, they are gone forever – to monitor that plan to ensure it remains on track and fit for purpose.

?Do you still think that a pension is a necessary evil? I would love to hear your comments.?