James Pinchbeck: The challenge around pensions

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A recently released Government Green Paper has revealed a suggestion that annual rises in pension payments should be linked to the Consumer Price Index (CPI) as opposed the currently used Retail Price Index (RPI).

Why should this be a concern for those looking to receive or are already receiving their pension?

Well the issue is that the CPI tends to be a lower rate than the RPI, for example the CPI at present is 1.8% and the RPI is 2.6%.

Therefore switching to CPI as the basis for annual increases is likely to lead to a decrease in the potential pension income received.

This is on the basis that in the last 22 years out of 27, up to 2015, CPI has been lower than RPI.

The proposed change it appears would also affect 11 million people in defined benefit schemes, also known as final salary schemes, where the level of pension in retirement is a proportion of the person’s salary.

However most private companies have now closed these schemes.

Overall the proposed move seems to focus on the cost and ability to service the provision of pensions for those receiving them in the future.

The challenge seems to be around the affordability of providing pensions now and in the future.

There seems to be a conundrum with the need to encourage more of us to ensure we can, through a pension, look after ourselves in retirement with the need to ensure providers can meet the financial demand.

Equally the attractiveness of investing in a pension is often dulled by the tax treatment around both amounts that can be saved each year as well as the continued reduction in the lifetime allowance.

Should the focus really be more about how we ensure more and more of us seek to provide for ourselves in retirement.

Whilst the introduction of Workplace pensions, a pension for all through Auto-enrolment, has gone someway to address this, for most it is unlikely to fulfil retirement needs.

With increased life expectancy and hopefully better health and healthcare, more and more of us are likely to live longer than the previous generation.

This often comes at a cost though, with more active lives, greater demands on the family purse and often the need in later life to seek specialist health and long term care.

Few of us, I am sure, will have sat down and thought how much income I might need in retirement. Certainly the state pension alone is unlikely to fund it all.

There is therefore the need to look at private pension provision or alternative investment plans for retirement.

Whilst I am not a Financial Adviser, my thoughts are that given I will hopefully have cleared my mortgage and the cost of my children’s post school education, then somewhere around 50% of my current income, and or that of our household, should be what I am looking to generate.

Whilst I am sure many of us will not like the idea of the CPI being used to calculate increases in pension received, perhaps more of us should be concerned about ensuring we are actually saving enough for retirement.

The gap in how much we are saving for our retirement is likely to be much greater than the reduction in sum we are to receive if there is a switch in the index used to calculate annual rises.