Challenges to pension planning

Question 1

Identify 6 challenges to pension planning

Answer 1

1. Not enough money being saved to guarantee a financially comfortable standard of living, predicted £30 billion shortfall of pension funding
2. Defined Benefit schemes reducing and more DC schemes being offered
3. Pension scandals
4. Falling share prices and lower annuity rates
5. Age of the working population v larger older population
6. Complexity of pensions (particularly state pension)

Question 2

Why is the reduction in DB schemes a problem?

Answer 2

A DB scheme is not affected by investment risk or annuity rate risk

Question 3

What is meant by investment risk and annuity rate risk?

Answer 3

1. Investment risk is falling share prices (which reduces growth within funds)
2. Annuity rate risk is the result of falling gilt yields and improved mortality rates (results in lower annuity rates)

Question 4

Why is the age of the working population a problem?

Answer 4

The state pension is a ‘pay as you go’ arrangement where today’s tax and NI pay for today’s retired. There are more people retiring than there are working.

Question 5

What is meant by pension scandals?

Answer 5

Misuse of pension funds, historic pension transfer advice and promises not being met.

Question 6

Why are state pensions particularly complex?

Answer 6

State pension age is increasing and amount being paid is decreasing, benefits payable through SERPS and S2P also decreasing