Lecture 7 - Pensions Part 1 Flashcards
Good news
1990 it was 52 and - life expectancy, according to the office of national statistics
Bad news
Many of those who reach the age of 100 will have been retired for more than 30 years
Treasury pays some pensioners for more years in retirement that they spend paying national insurance as workers
Represents a huge challenge for the government
Truth
State pension is likely to be far less per week than you expect
Some Expenses will drop when you retire but many others will increase.
Pension schemes
Government schemes Employer schemes Private schemes Single tier Defined contribution Defined benefit Money purchase SIPP
State pension age
2018 = 65 in men and 65 in women
The 2018 UK gov review resulted in a recommendation that retirement age rise from 67 to 68 by 2039, seven years earlier, in an attempt to reduce the 100 billion annual pension cost
Single tier pension
From April 2027, new universal minimum state pension
Requirements
Earned £155 per week and made national insurance contribution for 35 years which will be more generous, with up to £155.65 a week
Couples will each qualify for the full new payment as individuals, rather than receive the previously less generous joint couples rate £119.30 for individuals vs £190.80 for couples.
However if you are a woman who is either widowed or divorced and were talked into paying class B contributions when you were much younger, you will probably not have anything like enough pension contributions to get any more than £200-£300 per month
Ways to increase your state pension
If you have less than 35 years of NI contributions:
You will receive a reduced pension, unless:
- you have a record of NI credits for unemployment,sickness or being in a career role
- you make voluntary contributions to fill gaps in your NI record
- however there is a restriction on how far back you may go to make voluntary contributions
Or you can defer your state pension for as long as you want
- deferring will result in higher weekly pension
- For every five weeks you defer, pension increases by 1% to a maximum of 10.4% for a full year if you are under the old scheme
- for the new schemes you get a maximum of 5.4% if you defer for a year (maximum base pension of £8,000)
3 options at state pension age
Cease your working life and get your state pension
Continue to work and receive your state pension as well
Carry on working and defer claiming state pension
Don’t have to pay national insurance contributions if you carry on working after state pension age
Defined benefits schemes
These are generally run by large companies or public sector organisations
Members contribute a fraction of their monthly salary to the scheme, as does the employer
The annual pension entitlement is expressed as one fraction of the final salary based on a number of years service
This is a deferred salary, so it is easy to plan ahead
Defined benefits terms
Number of years are usually 1/60th or 1/80th of final salary for each year of service with the company
In these schemes, 40 years of service translates to 2/3 or one half of your final salary at retirement
Some include a lump sum, some do not
They provide annual increases for life, often index linked
In the event of your death, they will pay a reduced pension to your spouse and in some cases children
Your former employer is responsible for ensuring there is enough money to pay your pension when you retire
Defined benefit schemes
Many of these schemes have now closed due to the enormous cost to the company
The employer will bear the risk on the investment
Many of the remaining schemes are completely closed to new entrants
Other schemes have been renegotiated e.g Tesco now base pension on average salary
What happens with DB schemes
Employee and employer both contribute to the pension fund. These are also referred to as money purchase plans
Essentially they represent a tax-efficient investment plan where funds are invested until retirement
At retirement, the terminal value of the fund is used to purchase an annuity (tax-free lump sum)
Risk lies with the employee
DB schemes
Terminal value of the fund depends upon:
Contributions are made by both the employee and employer
Investment performance can vary
There will be fund charges
Your pension will be subject to annuity rates at retirement
Annuities
A retirement annuity is an income that is brought once with a pension pot and lasts for the rest of the holder’s life
A pension company will work out how long the pensioner is likely to live and will offer an income on the basis of whether the employee was a smoker or non-smoker
There are different types on offer e.g, fixed payments or index-linked
FSA warning
Pension experts say that it’s vital for savers who do want to retire to exercise their open market option when they buy an annuity.
Financial services authority show that most pensioners do not exercise their open market option and instead buy their annuity from whichever insurer managed their pension when they were at work
Now regulators are turning their attention to failures by financial advisors and company pension trustees to ensure savers get the best deal
