Not only do most public sector workers face a two-year pay freeze, but their cherished ‘gold-plated’ pensions are under attack. In his recent public sector pension review, Lord Hutton described as ‘fundamentally unfair’ a situation where private sector employees, many of whom should be saving more for their own retirement, fund the public sector’s more desirable ‘final salary’ schemes, potentially to the tune of £10 billion by 2015. New members of most of these schemes have already seen their retirement age rise to 65 and less generous ‘inflation proofing’ of their retirement benefits. Most also face a further hike to their retirement age and higher contributions.
For the majority of workers who contribute to personal pension schemes and have long been expected to take responsibility for their income in retirement, it’s a case of ‘welcome to our world’. We all expect to live longer and enjoy a more active retirement than previous generations but, according to the OECD, UK pensioners have the lowest retirement income relative to previous earnings in the developed world. The problem intensifies as more companies in the private sector shed expensive ‘final salary’ schemes and the government now plans compulsory saving for retirement in an attempt to prevent widespread ‘pensioner poverty’. Fortunately, powerful weapons are at the disposal of those taking responsibility for funding their own retirement planning.
Basic-rate tax payers who contribute £80 to their pension plan receive an additional contribution of £20 directly to their fund. For higher-rate tax payers the tax benefits are even more compelling – a total of £40 in tax relief allowed for every £60 invested (limited to £50,000 p.a. from next April). Add to this the powerful effect of compound interest and clearly the best advice is simply to save as much as possible, as early as possible. Your adviser will ensure that your contributions are sensibly invested in line with your risk appetite (or lack of it). With even public sector workers having to accept less generous pension benefits, it’s clear that careful planning for the future will be required of more and more of us.