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Nick Ingram of Barton Hatcher Ingram Financial Management Ltd asks if you are setting enough aside for your retirement.
You are 35 years old; you have been working for 12 years since you left University. You are married, or thinking about getting married. You have had 4 jobs in a variety of roles, climbing higher in status, salary, responsibility and importance, and you are looking forward to the next challenge in an exciting position.
You hardly think about your retirement, after all, with the best will in the world, you, like most of us will probably not retire until you are at least 60 years old, there are 25 years to go, and therefore plenty of time to think about all that. But is there?
In your 12 years of employment, you have probably been paid £250,000 to £400,000.
How much of it have you spent, and how much of it have you saved in pension funds to fund a similar lifestyle in your retirement - 10%, 20%, 30%, 0%? Do you want your lifestyle in retirement to stay the same, go up or go down?
Your lifestyle continues apace. You have already had a mortgage for 8 years and now it is time to trade-up. You are ambitious for your family, and you need more room. Your new mortgage however is now for £350,000. That mortgage, on a 25 year basis means that you will have to work until you are at least 65 years old, just to pay it off!
Nothing is static, and you will continue to improve your employment package, and your lifestyle will increase; the holidays will get better, the cars will get better, the children will be expensively educated and the outstanding mortgage will be going down.
In 25 years of employment, you have now been paid £600,000 to £1,000,000. How much of it have you spent, and how much of it have you saved in pension funds to fund a similar lifestyle in your retirement - 10%, 20%, 30%, 0%? Do you want your lifestyle in retirement to stay the same, go up or go down?
You are now 50 years old. The people you were, aged 35 years are now looking sharper, brighter and hungrier than you were at that age. They want to achieve your exalted status, but they don't want to be 50 when they do, they want to be 40.
During your working life you have been busy achieving your goals for your career and your family, but you are now 55 years old - only 5 years to go before the age you wanted to retire at - the ultimate goal.
In 30 years of employment, you have now been paid £1,500,000 to £2,500,000. How much of it have you spent, and how much of it have you saved in pension funds to fund a similar lifestyle in your retirement - 10%, 20%, 30%, 0%? Do you want your lifestyle in retirement to stay the same, go up or go down?
You have now had 6 employers in your 30 years since you left University. Some of them have included a pension as part of your employment package, some haven't. Some of your pensions you have contracted on a personal basis, and some have been a Final Salary Occupational Pension Scheme. Some have been Additional Voluntary Contribution plans and some have been Free-Standing Additional Voluntary Contribution plans. Some have been Personal Pension Contracts, and some have been Section 32 buy-outs. Some have been Stakeholder Pensions and some have been Superannuation plans. You have been contracted out of the 'State Earnings Related Pension Scheme' (SERPS) and you have been contracted back in by an employer's pension scheme. SERPS no longer exists, and has been replaced by the 'Second State Pension (SP2). Both do essentially the same thing, but both have different rules (as you might expect)
Since 1982, leaving aside the two variations of Final Salary Occupational pensions, there have been eight regimes (tax legislation differences) that 'personal pensions' have been written under!
How many of them do you have and how many of them do you understand? To improve this hugely complicated situation, the 6th April 2006 is to be known as 'Pensions 'A' Day.
From this date (if the mechanisms are in place) all existing pension legislation and 'regimes' are to be replaced with one set of rules for all pensions, whatever the legislation was when they were written and whatever your expectations of them were.
These new rules, although know as 'simplification' are complicated, and will effect the ultimate benefit you can expect from them.
The 'simplification' bit means that 'simply, everything will change'.
Most people who have contracted various pension schemes over the years will have some understanding of what each pension scheme does, or did.
Most people understand the pensions concept in that they give up some of their earnings now, invest wisely in a pension scheme (of whatever type) and expect that their contributions, times growth, times the length of the contract will give them a fund where eventually most schemes will give them 25% of the fund at retirement as a tax-free cash lump sum with the remainder of the fund going into an 'Annuity', that will provide them and/or their spouses with an income during their retirement. Most people know that the maximum that they can contribute into their pension plans during their working life is a percentage of their total taxable earnings, and that that percentage increases with age, or, even if you have no income (a baby or child, student, ill, unemployed, retired housewife/husband), you can still pension £3,600 pa gross without any evidence of age or earnings.
All of these assumptions belong to the era pre 'A day', and none but a few of them will apply after.
'A' Day will provide anybody who has any existing pensions (including Final Salary Occupational Schemes) with a whole new lexicon, a whole new way of understanding pensions.
Like your lifestyle, nothing will remain static.
It is hard to express in a short article like this exactly the impact that these changes will have on the entire working population of this country. Each case going in will be different, but each case coming out will be exactly the same!
Everything that you previously discussed with your Financial Advisers will need to be revisited and the explicit meaning of new phrases like 'Maximum Emerging Benefits', 'Lifetime Allowances', 'Certified Cash will have to be learned. You will need to know what an 'Income Withdrawal plan is, you will need to know the three tax treatments of your remaining pension fund your Widow/Widower might have to face at the time of your death after you have started to draw your pension.
As you near retirement you will need to know the name of the provider, your policy number and where the policy document is for the first pension you contracted when you were 25 years old (and all the subsequent plans). You will need to know the new funding limits and the eligibility rules. You will need to know the projected value of all, or any pension plans you have so as not to exceed the limits on retirement.
It is an exciting time. Are you ready for it? Do you understand it?
Nick Ingram is a Director of Barton Hatcher Ingram Financial Management Ltd
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