THIS week I heard somebody say that 2020 has been the longest five years of their life.
Pensions advisers are saying it too, but for different reasons. In the pensions business these days, change seems to be the only constant.
Chancellor Rishi Sunak tells us that, between furlough and assistance schemes the government is having to shell out at least £300bn, which will grow to at least £500bn after the scheme was extended to next March.
That money has to be clawed back somewhere, and our state pensions are a prime target. We’re like Little Red Riding Hood wandering in the forest: the big bad wolf of Downing Street is hiding behind the next tree.
So this week we’re showing you how important it is to plan for yourself, as our state pension may be a fraction of what people get today, by the time we retire. And the younger you are, the more crucial it is to plan.
Given projected increases to the retirement age, your retirement could be nine or ten governments away. Who knows what things will be like then?
It could well be that setting up a personal pension for yourself now, or taking advice on how much you could gain from saving more into your workplace pension, could improve your chances of being comfortable, when you retire.
The virus is not totally to blame. Long before Covid came along, cost-conscious politicians were sniffing around the state pension system as if it were a particularly tempting low hanging fruit – the easy target, the obvious way to save a few bob.
Back in 2010 they introduced the triple lock, which guarantees to increase state pensions every year by one of three measures: either the rate of inflation, the increase in average earnings, or 2.5 per cent, whichever is the greater each year. The idea was to make sure that pensioner income was not eroded by the gradual increase in the costs of living.
However, they almost immediately switched from measuring inflation by the retail price index (RPI) to the consumer price index (CPI), which is typically around 0.7 per cent lower. Now they plan to make further changes by adding owner-occupier’s household costs into the CPI (and renaming it CPIH), although not for at least five years yet. It all adds up to more uncertainty. Little Red better watch out.
This year the triple lock has become a potential financial timebomb, due to the ‘average earnings’ clause. Due to Covid, many of us had our wages cut to 80 per cent, which meant an artificially low average wage this year – but if we do manage to get back into our workplaces anytime soon, Rishi will be quaking in his boots – a sudden massive jump back to full earnings could send next year’s average wage, compared to this year’s, off the scale.
His boffins reckon the triple lock could force the state pension up by at least 20 per cent.
Sunak’s team estimated that if he dilutes the triple lock protections, then the medium term savings could be £8bn.
Suddenly, and for the first time, the benefits of dismantling the triple lock could be greater than the pain of doing it.
The government is also eyeing up the levels of tax relief on pension contributions. Tax relief was always designed as an incentive to save, but some critics say it was an unfair and lop-sided one, as most of the relief goes to higher rate taxpayers. More possible changes.
We also have to bear in mind that the UK state pension is very miserly to start with.
Recently, the Organisation for Economic Cooperation and Development (OECD) looked at the various state pensions in developed countries around the world. They worked out the ‘replacement rate’ for each, meaning what percentage of the average wage you get from your state pension. With just 29 per cent, the UK is absolutely bottom of the pile, behind even Poland and Mexico, and far short of the European average of 71 per cent.
Compare this to the top scorers, Turkey and the Netherlands, where your state pension will be 100 per cent of the average wage.
It is obvious that government is prodding us to save for ourselves, and not rely so much on the state. If that mindset goes on – and we believe it will – should you not consider taking greater control of your own financial future right now?
We can help you give that wolf the slip.
Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice or at www.mkennedyfinancial.com
