Lynn Bell warns that more individuals need to make provision for their retirement due to the potentially uncertain future of the state pension.
In the current tax year, for the first time, the cost to the UK government of state pensions is set to surpass £100 billion, according to the Office for Budget Responsibility. This figure does not take into account other benefits state pensioners can claim, and is set to rise each year.
There will come a point where the state pension scheme is unsustainable, as some countries across the world have already found.
The rising cost of UK pensions is caused partly by improved healthcare, which helps us all to live longer. The government has tried to redress it to some extent by increasing the age state pensions can be claimed, but this has not dropped the annual figure, which is now 14% of GDP.
Voluntary pensions
In the UK, the employer must have a pension scheme in place, but it does not have to be used. Employees can opt not to contribute to the scheme, and if that is the case the employer does not have to contribute either.
Self-employed workers also have the choice whether to contribute to a pension or not.
The need for a pension other than from the state
Most people have ideas about how they would like to live when they retire, but very few think about how they will finance the lifestyle they desire until it is too late. For those that wait until their forties to start thinking about a pension, the contributions needed to give them a reasonable pension can be too high.
For people in their twenties, retirement seems a very long way off, but that is the best time to get something in place. A delay of just ten years in starting a scheme can make a big difference to the pension pot when they reach retirement. This is because for those ten years all their contributions will be making money and will continue to do so for the length the scheme has to run.
Of course, there are some jobs that have pensions attached, such as the armed forces and many roles within large organisations. Unless someone is lucky enough to have a pension included, they really need to think about saving for their future now.
A tax-efficient way of saving
Pensions are the most tax-efficient way of saving as tax relief is given on the contributions. This relief is given at the highest rate of tax being due as long as the contributions are not more than the annual salary or do not exceed the annual allowance, which is currently £40,000.
All other forms of savings or investments are taxed for most people, and for those that do not have any other income, they can claim their returns on investments tax-free. A pension goes one step further and basically amounts to a contribution from the government towards your retirement pot.
Prepare for the worst?
The government needs to do whatever it can to reduce the burden of state pensions and whether someone is employed or a business owner, they can’t rely on the government to provide for their old age. Our current trajectory makes it likely the government will go the way of other countries, and state pensions will be stopped.
