Pensions Part 3

Mark Sandford - December 2012
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In a previous article on this subject, I highlighted the lack of adequate pension in the private sector as opposed to State funded schemes on offer in the public sector. The government has at long last recognised this by bringing in a new workplace pension scheme for the private sector that will be introduced progressively within the next 6 years. This is intended to plug the black hole of individuals who at present are not making any provision for retirement at all, regardless of whether they can afford to do so.

The new scheme revolves around a contribution rate aimed ultimately at 8% of earnings, 4% from the employee, 3% from the employer and 1% coming from government tax relief. Whether this will ultimately provide an adequate pension pot for the typical individual remains to be seen and many would suggest that this is not enough. That aside, there has to be recognition that within the last three years, salaries and wages have not kept up with inflation which has put more pressure on household budgets. Therefore a married man with a family to support would think twice about increasing his contribution to his pension scheme when he has other costs to consider and not just paying the mortgage.

Most staff will be paying into what is known as a default fund so that they join the pension scheme but have no choice as to where the money is invested. This may take a conservative approach to minimise losses or the risk of losses but would entail the prospect of smaller returns. For example, the fund might invest in government gilts at the outset, then move on later to more riskier investment in equities or even commodities. The objective would be to expand the pot during a person's working life so that he or she has an adequate income to retire on.

Workers would also be advised to review their pension provision at least once a year just to see that the pension pot is living up to their expectations and could fund the lifestyle choice. Staff would also be advised to save into one fund and not several as persons do change jobs over their careers or are forced into making changes due to other factors such as redundancy. Individuals also have the opportunity to opt out of the new workplace scheme if they choose to do so but would lose the firm's contributions to their pension pot.

In his latest Autumn statement, the Chancellor has decided in his wisdom to cut tax relief available to people's contributions into a company or private pension scheme. The lifetime allowance for pension savings will be cut from 1.5 million to 1.25 million in n April 2014 and the annual allowance will be cut to 40000 a year from 50000 a year. The annual allowance alludes to the maximum amount that can be saved each year before incurring tax. According to George Osborne, this will save 1billion a year and only affect 1% of all individuals saving into a current pension plan. This measure has been criticised for sending out a mixed message to the nation over saving for retirement and could affect middle management in both public and private sectors. Those who need to boost their pension fund and have the means to so could also be hit by this measure. What is more, the very rich would divert their investment into other areas, just to avoid paying this tax.

Mark Sandford - Permission granted to freely distribute this article for non-commercial purposes if attributed to Mark Sandford, unedited and copied in full, including this notice.

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