Pensions…again!

A lot of media coverage in 2011 was given to the debate around changes to public sector pension entitlements. We look at why there needs to be change for the schemes and what it might mean to you, even if you don’t work for the Government.

While the arguments for and against the proposed changes will rage on, one undeniable fact is that final salary pension schemes are expensive and this is why the government is seeking to follow most private firms in limiting pension costs as it reins in public spending.

This poses two important questions – why are the costs so high and what does this mean in the context of your Financial Planning?

In simple terms the costs of pensions have increased as people are, on average, living longer (so a pension has to be paid for longer) and the income available from secure investments has gone down.

If you are in a Final Salary pension the scheme gives you a pension promise of the income that will be paid at retirement. The additional cost to provide this promise because of the reasons above has increased over the last 20 years and this will have been borne by your employer.

The increasing costs have caused many private companies to close these pensions, and recently Shell, the last FTSE100 Company to have a final salary scheme, decided enough was enough and no new employees will be able to join. The public sector will be by far the largest employer to offer these pension promises, and even after the proposed changes these will be attractive schemes to be a member of.

So what does this mean for your financial planning? If you have a private pension these increasing costs will have a direct effect on the income that you may receive in the future. We will need to consider what a lower income will mean to you, or setting aside more to build a larger pension fund.

The most important thing is to regularly review your existing arrangements, including assets you have outside of pensions that may provide you with capital or income, and consider the level of income you would like to have in the future.

If you need help with this please speak to your usual Old Mill contact.