The last decade has seen the biggest pension changes in the ways in which we prepare for old age since the introduction of old age pensions in 1908, but many savers still haven’t adjusted to the new realities that will determine their futures when their working lives end.
In 2001, amidst widespread concern that too few people were saving enough for their retirement and that life expectancy was continuing to grow, the government introduced Stakeholder Pensions.
Pension Changes – Stakeholder Pensions
These new pensions were designed to be more affordable for people on lower incomes who were struggling to afford any kind of contributions. They operated like a normal index linked pension and most followed the performance of the stock market, but there were a few incentives to encourage low income savers to pay into a pension pot.
Management charges on stakeholder pensions could not exceed 1.5 per cent of the pot in the first ten years of the fund and thereafter charges could not exceed one per cent.
In addition to this, stakeholder pensions allowed savers to switch pension companies at will without charge and to stop payments whenever the saver decided.
In short the stakeholder pension was a low risk cheap pension fund that gave savers as much flexibility as possible as payments into the fund began at £20 per month.
The rules surrounding company stakeholder pension schemes have changed during the recession; as of October 2012, employers do not have to include new employees and people returning to work in the pension scheme, but they do have to continue with schemes arranged before October 2012 and the pot still exists even if you change jobs.
Pension Changes – Death of the Final Salary Pension
One of the biggest pension changes in the last decade was the huge reduction in final salary pensions, only a lucky few will now receive these exceedingly generous entitlements that reflect your earnings at the point at which you retire.
There is currently just over £1 trillion in funds allocated to the country’s remaining final salary schemes, and only recently the level of liabilities has reduced to a level just above this figure. For much of the last decade, Britain’s final salary pensions have been in a precarious position, costing more to the economy and taxpayer than the country could realistically afford.
The recession has resulted in low returns on investments for UK pension funds and this, combined with more people in retirement living longer and claiming more has left final salary pensions facing a crisis.
Pension Changes – Government Involvement
In 1997 when the then Chancellor Gordon Brown removed tax credits on share dividends, index linked pension funds lost huge sums, reducing the total value of pension funds in the subsequent decade by £100 billion, according to the institute of actuaries
Overall this has placed the burden of responsibility for savvy investment on to the individual, super-generous schemes are becoming a thing of the past as businesses pull up their financial drawbridges and excluded new savers.
The last decade has seen the end of many of the financial certainties that we have taken for granted, but it doesn’t necessarily mean that savers today are condemned to an old age of penury.
It does mean that people of working age now need to have a very different mindset from their parents and make investing in their pension funds an active part of their day to day financial life.
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