A century of pensions
Simply Money Spring 2009
Thanks to Lloyd George and his 1908 Old Age Pensions Act, state pensions are 100 years old. In 1909 the pension was five shillings (25p) a week, which was roughly 16% of average wages at the time; 25p then is worth about £19.30 today.
Today the basic state pension for an individual is £95.25 a week, which is less than 20% of a typical income of £25,000 a year, while the pension for a couple is higher at about 30%. While this represents some progress, it is clear that a 70% (or even 80%) fall in income when you reach 65 is likely to constrain retirement activities considerably.
Of course, you already know the importance of making personal provision for what is frequently described as the longest holiday of your life; but failure to plan adequately could make that holiday closer to the experience of an unfinished 1960s Spanish hotel, than an enjoyable time of life.
How much is enough?
Recent research by Friends Provident suggests that people expect to need as much as £832 a month to live on (after housing costs) which is much more than double the amount a single pensioner currently receives from the state.
In practice, an income of even £10,000 a year (especially when it is subject to tax) is unlikely to be adequate to provide a comfortable level of retirement living. With people being far more active than was the case a generation ago, they are likely to need more, rather than less, to live on later in life.
Of course, people are also living much longer than a century ago. In 1909, average life expectancy was 52, so few people ever reached the minimum pension age of 70. Today, life expectancy for a pensioner is around age 77 and for younger people is likely to be much higher.
This means that your retirement pot has to last longer. What is more, interest rates are very low at the moment, so those purchasing an annuity are hit by a double whammy which considerably reduces the income they can expect for a given pension fund.
For some, this could mean deferring their retirement, or using the tax free cash available under their pension scheme for a few years, before making a decision about purchasing an annuity or drawing an income directly from the fund. (This is only available from age 50 to 74, with the minimum age set to rise to 55 in April 2010.)
There are options
For most people a conventional pension plan or self invested pension is the obvious choice for retirement planning, because there is tax relief on contributions at up to 40% (subject to some restrictions) as well as no UK tax on fund growth (other than the 10% tax on dividends from UK companies) and a quarter of the fund can be taken as tax free cash. However, Individual Savings Accounts also offer tax efficient growth and while there is no tax relief on money put in, there is equally no tax on money taken out, whether as a lump sum or an income.
Some people suggest moving money from an ISA into a pension scheme as this can generate an immediate tax saving, but this is a matter for individual advice, due to the tax implications. In addition, other forms of tax efficient investments are available but these generally involve substantially higher risk and should only be used with professional advice as part of an overall investment portfolio.
Key points
- People live much longer today than in 1909
- The cost of living is rising fast for pensioners
- Personal retirement planning is absolutely vital
