In the UK, pension systems largely fall within one of two buckets. There’s the State Pension, which you pay into throughout your working life with a deduction to your salary, and a private pension, which is self-managed. In many ways, they could also be called ‘passive’ and ‘active’ pension strategies.
This blog post will look at both of these UK pension options and outline exactly why a private pension isn’t just important — now more than ever — it’s imperative.
Why Do I Need a Pension?
A pension is basically a long-term savings plan. At some point in life, we are unable to work any longer largely due to age, or we simply want to step away from the daily grind in order to pursue hobbies, prioritise our health or spend more time with our families. Having a pension in place offers the opportunity to leave work at some point, and still be completely financially independent.
In today’s economy, it’s becoming more and more difficult for children to support their parents’ retirement years. This is due to a number of reasons — smaller family size means fewer people to share extra financial responsibility, shakier job prospects for younger generations thanks to the gig economy and lack of employment safety, and the general increase to the daily cost of living.
Essentially, it’s more important than ever to be as financially independent as possible.
What’s a UK State Pension?
A UK State Pension is a monthly amount of money paid automatically to an individual by the British Government. They are funded from your National Insurance (NI) contributions over the course of your working life. How much you get in your pension each month depends on factors such as:
- How many years you were working
- The size of your monthly NI contributions
- When you start claiming your pension
It’s possible to find out exactly what you’re set to get in your pension by visiting the ‘Check Your State Pension’ page on the GOV.UK website.
(Current) Benefits of a UK State Pension
For those individuals who are happy to take a completely passive approach to their retirement finances, state pensions’ process of automatic deductions is a great way to take the worry out of saving. After all, something is better than nothing — and more so for those who find managing their money difficult.
The auto-enrollment method for anyone over the age of 22 will help those just getting into the workforce amass some pension savings without the process being intimidating. There’s a rule of thumb in saving — which is true regardless of what type of pension you choose — starting earlier is always better.
Realize that having a state pension does not mean you can’t have a private pension too. In fact, 2/3 of the current UK workforce has a private pension plan in place for retirement. With the current state pension giving just £159.55 per week, anyone who doesn’t gain financial literacy and try to increase these numbers could find themselves in a scary situation when retirement knocks.
The Problem with State Pensions
Last year’s OECD report on the state of pensions across Europe paints a stark picture that — while a dry read — would make even the most optimistic worker sit up and take notice.
In a nutshell, modern UK State Pensions simply cannot keep up with the way in which the modern workforce operates.
“Concerns about the financial sustainability of pension systems and retirement income adequacy remain, given the projected acceleration of population ageing, higher inequality during the working age and the changing nature of work. Past reforms addressing financial sustainability will lower pension benefits in many countries.” (from the OECD report’s Executive Summary).
Let’s break down these reasons a little further.
An Aging Society
In the EU, the current retirement age keeps rising — and will continue to do so. This is a problem for both older and younger generations. Older generations will have to work longer in order to be eligible for the low payout having less time to enjoy retirement when you are finally able to leave the workforce.
According to a report by UBS, the UK State Pension system is one of the worst in the developed world. Many countries have started to build in financial disincentives for early retirement into their pension systems, and the new report suggests that any current benefits will slowly be phased out in order to lessen the strain caused by an ageing population. Indeed, if older-age employment doesn’t increase from current levels, there will be fewer workers to sustain the pension pot system.
Patchy Career Paths
For younger generations, lack of people going into retirement means that the steady flow of job vacancies will continue to dry up, making it difficult to find work in the first place. Many will need to work more years to make up for the slow start. It creates a vicious cycle. This isn’t helped by the current gig economy as we mentioned above. This job-switching, different contract types and different pay-scales to contend with give younger generations little consistency — or choice — when it comes to how much they put into their state pension through their National Insurance contributions. This lack of agency is deeply troubling for financial stability later in life.
How Will Brexit Affect State Pensions?
The current elephant in the room — we have no idea the impact that Brexit may have on UK State Pensions going forward. This is especially felt by British expats overseas who have relied on a strong Pound and duel-country-agreements to keep their regular State Pension payments being sent to them overseas. Regardless of the type of Brexit that we’re in for, the UK Government has already admitted there will be multiple issues, from expats who live abroad to the very processes of insurance that currently keep state pension pots safe from collapse.
How Do I Protect My Financial Future?
For individuals who are keen to take an active approach to their retirement pensions — not leaving anything to chance or political whims — consider a private pension. There are a number of different opportunities when it comes to saving for the future, and here at The LandLord’s Pension, we provide a range of options to match your specific needs.
Private pensions are a way to take charge of your own finances, but they also have other potential benefits:
- The possibility of a much stronger return, as the private sector is geared towards making profit in order to keep investors happy.
- The government could potentially change their minds at any time with regards to how their pensions are paid out (or paid into!), which — along with Brexit — make them incredibly unreliable.
- Tax breaks are sometimes available when taking out a private pension, making your investments much more efficient
- There isn’t a one-size-fits-all private pension. This gives you a large amount of flexibility when deciding what works best based on your specific situation.
To be pro-active and discover the many benefits of our SSAS and SIPP opportunities, contact us at The LandLord’s Pension today, to discuss your retirement fund with one of our specialist pensions experts.