A couple of weeks ago I laid down a challenge to Scott, my insanely young looking financial adviser, more in hope than in expectation!
But Scott has risen to the challenge and I can do more than pass on his words to you about how he intends to make pension saving sexy…
Best of luck Scott!
Renee, thanks for your kind comments regarding our review and also thanks (I think!) for the challenge.
As you have stated, there is an ever growing gap between the amount people are actually saving for their retirement and the amount that they should actually be saving. The causes for this could be pinned down to many different factors including the fall in employer funded pensions, the declining state pension, the increase in life expectancy and increased levels of debts.
Another major reason I would say is a reluctance to lock money into a pension, which cannot be accessed for a number of years. The key decision for all of us is whether to “save for tomorrow or live for today”. Of course, the answer lies somewhere in between the two but for the majority; it seems that they live for today only.
We are all aware that the younger you are when you start to save, the greater the likely returns that can be achieved. Or to put it another way, the younger you are when you start saving, the less you will need to invest to achieve the same result when you are older.
However, as Rod Stewart sang, “I wish that I knew what I know now, when I was younger” and it is easier said than done to save for your retirement when you are young.
It is difficult for most of us to imagine where we will be in a month or two never mind 20/30/40 years. Especially, in the early years of your working life, where there are many different financial pressures and priorities that must be faced – paying off student loans, saving up for your own property, having nice holidays, or even buying a new outfit for the work’s Christmas night out.
So how do we go about making pensions “sexier” and improving their attraction and worth to not only employees who contribute but also to employers who fund them?
For me, the main attraction of investing in a pension is already in place and that is the tax breaks. There is tax relief given on employer and employee contributions, and the fund itself is free from capital gains tax.
(I should add that it would have been more efficient had the current Prime Minister not abolished the dividend tax credit back in 1997 but that’s for another time!)
The key to making pensions “sexier” is therefore to raise awareness of these tax reliefs with employees and employers but this should be combined with a harsh “reality-check” of the capital required to provide a decent income in retirement.
This should be done not just when the pension starts but also on an ongoing basis so that we can check the progress and plot expectations against the reality.
Of course, some will say that the government will provide the state pension and I will be fine. The full basic state pension is currently only £97.65 per week – not overly generous.
The government are also well aware of the pension funding crisis and are making plans to address this – or I should say for businesses to address this.
From 2012, we will see the phased introduction of the National Employment Savings Trust (NEST). This is effectively a new national pension scheme brought in by the government where employers will have to auto-enrol individuals, who fall within a certain earnings range, into NEST or an alternative pension scheme.
Most importantly both the employer and employee will have to make a compulsory pension contribution. The contributions will eventually be 3% of the banded earnings for employers and 4% for employees. The “generous” government intend to add in tax relief of 1%.
I will be watching with interest over the next few years to see how the government go about in “bringing the sexy back” to pensions!
(I should add that although both the Conservatives and Liberal Democrats have raised concerns about NEST – I would expect some form of compulsory pension scheme to go ahead regardless of who wins the election)
Well done, Scott. I never thought a 3% banded rate could be so sexy!