News & Insights

Could the UK’s state pension fund run out in 14 years?

To help workers get the funds they deserve, the Pension Protection Fund will pay out. However, this will lead to a significant cut for some employees; those who’ve not yet reached retirement age will receive 90 per cent of their pension up to a cap of £34,655.

In these times it is prudent for people to seek regular pension planning advice, and at Blacktower, we recommend advise clients to talk us regularly about their retirement goals.

Many of our clients have chosen to transfer their pension savings from defined benefit schemes into a Qualifying Recognised Overseas Pension Scheme (QROPS) or a Self-Invested Pension Plan (SIPPS). This is because pension transfers into a QROPS or SIPP provides the retirement saver which far more flexibility when it comes to their investment options.

Pension planning for the difficult times ahead

It’s not irrational for Britons to be concerned over their pensions, whether they’re in a defined benefit scheme or not. Despite the occasional bit of positive pension news (for some people, at least), the general outlook is negative. The year started on a down note when a report released by the Government Actuary’s Department (GAD), which is responsible for taking in national insurance contributions and using the amount to pay state benefits, revealed that the UK’s state pension fund, currently at around £25 billion, is under strain and on track to reach zero by 2032.

In the report, the GAD said that this current balance is “just over one-fifth of annual expenditure on benefits”, explaining that, although the balance is expected to rise for another seven years, after 2025 it will sharply fall, running out completely by the early 2030s.

Britain’s ageing population is known to be a primary factor causing the problem. A Treasury spokesman told the Telegraph that “life expectancy and demographic trends will continue to pose a challenge for the public finances”.

For the government to be able to pay the amount needed from National Insurance Contributions, the GAD states that a tax rise for workers under 50 is likely necessary. It has said that the increase in national insurance rate will have to be around 5 per cent higher in order for the fund to just about cover the cost of paying the state pension. But such an increase in tax is sure to create problems for younger generations, as it will lead to the average worker experiencing an increase of £120 on their annual tax bill.

An alternative solution, as suggested by GAD, is to lift the current cap of 17 per cent on the Treasury Grant. At the moment, parliament can approve a Treasury Grant of up to 17 per cent of estimated benefit expenditure to help boost the pension fund when it falls below a certain level. But 17 per cent will not be enough to prevent the fund from reaching zero. However, increasing the legal maximum amount that can be granted would require new laws to be made, and it would also end up costing the taxpayer more.

It is news that has, once again, drawn criticism from experts examining the UK state pension system and has highlighted the importance of saving up a private pension. Many believe that if nothing is done to correct the UK’s unsustainable pension system, there will be dire consequences for workers of the future.

One commentator was the pensions director at Ageon, Steven Cameron, who said that because pensions are funded on a “pay as you go basis”, future retirees have to depend on the national insurance contributions of the workers before them to pay their pension, which can often lead to the development of “intergenerational tension”.

Whatever may happen to Britain’s pension system in the future, one thing’s for certain: the UK government has some tough decisions ahead of it if it wants to support all British citizens adequately, but it’s also important that savers do everything possible to help themselves.

For advice and information in relation to retirement investment planning and pension transfers, contact a Blacktower financial adviser today. We’ll provide up-to-the minute information regarding what you could choose to do for your pension. Seeking help could mean you are able to maximise your pension pot and therefore increasing the chances of you enjoying the retirement you deserve, whether that involves staying at home in the UK or moving abroad overseas to exciting new location.

This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

Other News

Final salary pensions – why now is a good time to cash in

Juicy lottery-sized sums are being offered to savers to tempt them out of gold-plated workplace pension schemes and into personal plans. We’ve explored whether you should consider taking a final salary pension, as well as the benefits and drawbacks of withdrawing.

What is a final salary pension?

A final salary pension, sometimes referred to as a gold-plated pension, is a special style of retirement fund that is based on your final or average salary.

The main difference between this and a defined contribution pension is that a final salary scheme gives you a guaranteed sum annually for the rest of your life when you retire.

To work out the value of your final salary scheme, consider a few factors: 

  1. Your final or average salary at your place of employment (confirm this with your employer)
  2. Your length of service
  3. The final salary scheme’s accrual rate (this is often 1/80th)

Your final salary pension will take each factor into account, and the resulting figure will be the guaranteed annual sum you are entitled to.

For instance, if you worked somewhere for ten years, and leave on a salary of £100,000, with an accrual rate of 1/80th, you will have a guaranteed retired annual income of £12,500.

It is possible to undertake a final salary pension transfer. Depending upon how long you expect to enjoy retirement, this could be a favourable choice. However, it’s important to consult a financial advisor to make your final salary pension transfer values work harder.

What are the benefits of transferring a final salary pension?

Assessing your final salary pension transfer value, you might consider it worthwhile to withdraw. We’ve outlined the main benefits of taking your final salary pension:

Receive the cash value of your final salary pension

Withdrawing from a final salary scheme allows you to receive a cash lump sum in return for forfeiting your guaranteed income in retirement. This final salary pension transfer value is the main reason to withdraw from a scheme, as it offers you financial freedom.

Remove ties with your employer

This is an especially important point if you’re concerned that your employer may not exist throughout your full retirement. For most, the pension protection fund (PPF) will cover your pension, but, for especially high earners, there is a PPF ceiling of £41,461 (as of April 2020).

Enjoy a flexible income in your retirement

A final salary scheme entitles you to a guaranteed annual income when you retire, but if you go down the route of transferring your final salary pension you will be able to enjoy a little more flexibility in how you receive your income. Usefully, by withdrawing from your final salary scheme, you can choose to take more out in your younger years.

Choose how you want to invest your pension

A final salary scheme is controlled tightly to accommodate all employees and their interests. When withdrawing from the scheme, however, you can take complete control over how your pension fund is invested.

The considerations you should make before transferring your final salary pension

While there are certainly benefits of going down the route of transferring final salary pension funds into various other pots, it’s important to consider what you’ll be giving up:

  • Entitlement to a fixed annual income for the rest of your life
  • A safe income that doesn’t fluctuate with volatile markets and share prices
  • Spousal and family benefits that come with a final salary scheme

 Example: Should I cash in my final salary pension?

An example is Mrs Dee (not her real name), 4 years ago she asked for her final salary transfer values, which came in at £250,000 – a nice sum, you may think. After reviewing all the facts and figures available, however, I advised Mrs Dee to leave her final salary pension where it was, which she duly did.

Towards the end of last year, because of favourable market conditions, I applied again to see the value of transferring her final salary . This one came in at just under £600,000.

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French QROPS can help protect from currency fluctuations

Given the financial and political situation in Britain and Europe right now it is likely that more and more British people will look to move their pensions out of Britain, with a QROPS in France possibly the most popular potential option.

Over recent weeks the value of Sterling has taken a significant plunge resulting in significant rises in living costs for those reliant on the currency for most or all of their spending needs.

Inevitably, this means that many have had to reconsider their wealth management and financial planning strategies. Against this backdrop it is easy to see why experts are predicting a spike in the numbers of people taking advantage of a .

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