Pensions shake up: not over yet
In April 2010 several major changes were made to the basic state pension, but the new Government has many other reforms on which it is either consulting or preparing legislation:
State pension age (SPA) In October, the Government announced that the SPA for men and women will rise to 66 from April 2020. As a result, the phasing-in of a SPA of 65 for women will also be accelerated between April 2016 and November 2018.
Inflation adjustments Many increases for public sector pensions, private sector final salary schemes and state pensions have traditionally been linked to movements in the retail prices index (RPI). In the small print of the June Budget, the Government announced that for state and public sector pensions it would generally be switching over to the consumer prices index (CPI) from April 2011. A subsequent Department for Work and Pensions announcement revealed that the same revision would be applied to statutory increases for private sector final salary schemes – both during and before retirement.
Annuitisation The June Budget moved from age 75 to age 77 the point at which private pension funds must be used to buy an annuity or switched to an alternatively secured pension (ASP). The Treasury has since issued a consultation paper on scrapping the requirement to buy annuities altogether, abandoning the unloved and largely unused ASP and reforming the income withdrawals rules. Changes are now likely to come into effect from April 2012.
Tax reliefs In October, the Government announced revised restrictions on the tax relief available on pension contributions, designed to replace the current special annual allowance from April 2011. The new regime cuts the annual allowance – the effective limit for tax-relieved pension contributions – from £255,000 to £50,000 per tax year, albeit with some scope to carry forward unused allowances.
Experts estimate that there is a yawning gap of over £1,100 billion between most people’s expectations of what they will get in retirement and what they will actually receive.
As we have always advised, it is never too early to begin saving for retirement and to review all your pension options. The nearer you are to retirement age, the less time and fewer options you have to take any necessary remedial action. Otherwise, as one commentator has put it, you have to consider a ‘triangle of compromise’: saving more now, working for longer, or retiring on less money.