There are two sides to our pensions coin
HERE is a new truth about our retirements: unless we act now, we are just not going to have the same comfortable lifestyle that our retired parents are enjoying.
We need to think ahead, to make changes to boost our pension savings.
Here's why, and there are two sides to the pensions coin: our workplace pension, and then our basic state pension.
Workplace pensions have changed beyond recognition over the past 15 years – and not in our favour.
Back in 2000, and for nearly 10 years after that, many large companies and public sector organisations had those brilliant final salary pensions, also known as ‘defined benefit' because there was a certain guarantee on what you would get.
The trouble is, these depended on good returns on the investments inside the pensions, to fund these generous gold-plated guarantees, but as investments markets took a downtown, so did the returns, and many large schemes found themselves short of cash – but the company still had to meet its guarantees. This meant delving deep into their own pockets to make up the shortfalls.
The year 2009 was when a lot of it came to a head. Companies which announced that year that they could no longer sustain a final salary scheme, and so were closing it to new employees, who would save into a much less certain defined contribution schemes (which have no guarantee) instead.
The companies who did this included Pirelli Tyres, Dairy Crest Foods, Costain Construction, Morrisons supermarkets, Barclays Bank, IBM and Fujitsu.
Our parents got out before that major shift happened, and many of them are on the generous final salary pensions – in fact, 98 per cent of workplace pensions still being paid out are from final salary schemes.
We will not be so lucky. Most of us won't have access to such security, and are perhaps being lulled into a false sense of security when we see the apparent comfort, even luxury of the lifestyles of our retired mums and dads.
Everyone agrees that the introduction of auto-enrolment into your workplace pension, which came in on October 1 2012, has been a great thing for getting us all saving towards our retirement. Prior to that, if your company had a pension scheme, you often had to get up off your bottom and enrol yourself, which, due to what we call ‘pensions inertia', many people just never got around to.
However, even of those who were auto-enrolled, many stayed with the ‘default' setting, and are still paying the minimum into their workplace pension, which means they'll be getting the minimum back out. It's better than nothing, but you could ask to up your contributions, and your employer might even agree to meet you on that by increasing their contribution as well.
However, many will not – and will end up with much less to retire on than their parents.
Now let's look at the state pension.
We know that the government has to recover the massive costs of lockdown, aid to businesses, and the furlough scheme, so it's no surprise that the state pension is also in the spotlight as an area where cuts could be made. This is nothing new; they've been tinkering with it since long before Covid.
There are informed rumours that this year's autumn budget could feature an overhaul of pension tax relief, a new charge on employer contributions, making it less attractive for employers to match your additional voluntary contributions, and even a dramatic cut in the pension lifetime allowance.
At the bottom end of the scale, the number of pensioners living below the poverty line (on less than 60 per cent of the average national wage) is at its highest since 2012.
Has this hit home with you? Would you like to have a friendly chat with us, so that we can give you some professional advice on how to boost your retirement lifestyle?
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com