Introduction
Personal financial planning is imperative in wealth creation. Personal financial planning is fueled by the need to achieve set goals whether today or in the future. It is essential for the upcoming working class to develop new strategies that will help them to save money for retirement. Personal financial planning cannot be measured today, but can only be evident in a couple of years. As young people enjoy new jobs and opportunities, they must think about life after retirement. Therefore, it is critical to start saving at an early age to accumulate wealth over the years until retirement. The most common way of personal saving for retirement is through pension schemes. A pension plan can be either private or public, but they all play the same role. In the UK, they are many players who offer different packages of pension schemes to the public. However, it is imperative to consider the benefit associated with each pension plan before committing yourself. According to Booth (2015) personal financial planning regarding investments, pensions program is the best way to achieve financial freedom (p.5). Moreover, it helps an individual to succeed in their goals and objectives. This report critically analysis personal financial planning and how it can help young employees and students to achieve financial freedom. Specifically, it analyzes the pension plan that will assist them to save money for retirement.
A snapshot of the pension industry in the UK
The UK pension market has many players who offer different packages. The market is highly dominated by three players including Tower Watson, Aon Hewitt and Mercer (Granville & Mallick 2014, p. 224). The three big players in the industry account for more than 70 percent of the current market share. The market has many players because there are no barriers to entry. However, the market is highly regulated with new reforms being enacted almost every year. According to Hill (2013, p. 345) UK pension providers are facing more than three times as many regulations compared to the last six years. Economists have warned of a possible crisis if the current trend continues. They argue that the government is implementing new reforms and regulations too much, too soon. The National Association of Pension Fund noted that there is a steady increase in government release regulations relating to pension management (Zantomio 2015, p. 733). For instance, it noted that there was 71 document issued in 2014 concerning the conduct of pension funds. According to Johnson (2015), many of the recent changes relate to the automatic enrollment of workers in the workplace pension schemes that came into effect in October 2012 (p.517). The auto-enrolment scheme was intended to help workers to save money towards their retirement that is an under-defined contribution scheme. The outcome of the retirement benefit depends on the financial input of the saver’s investment in the scheme. The UK pension regulatory authority has developed a new Code of practice that must be followed by all pension firms. The government has proposed to carry out a program review to ensure compliance. According to the Pension Regulator, workers will not pay consultancy fees in case of automatic enrollment schemes (Grech 2015). Moreover, the regulatory authority has noted that most of the changes in the new governance rules stem from the changes made resulting from a new definition of money ‘purchase benefits.’ Moreover, the new Pension Tax Bill 2015 has given savers a remarkable opportunity to access their pension schemes without purchasing an annuity or being subjected to high taxes. This bill will help young workers to save more toward their retirement. The private Pension Bill 2015 will allow young savers to introduce a defined Ambition Pension Scheme that can be used to supplement a defined contribution scheme. The bill also permits the creation of a collective pension scheme that can be used for investment purposes.
Pension crisis in the UK
The pension industry has been celebrated in the UK for helping workers to save more money for their retirement. However, the systems have come under criticism recently due to the scandals and lack of reliability. Although the pension system offers a guaranteed basic pension from the state, the reliability of the system has been questioned by many people because they have failed to honor their promises. Moreover, the system has recently being a subject of negative publicity that has resulted in the current pension crisis in the UK. This has discouraged people from saving for their retirement in a pension scheme. Moreover, the pension crisis has resulted from a lack of flexibility on pension policies. As a result, the government has introduced regulations to restore public trust in pension schemes.
The other factors that have contributed to the crisis are the economic factors in the economy. Today, the pension schemes are very different from those of the nineteen-eighties where the employer promised employees a specific amount of money on retirement. Due to the high cost of operation coupled with a fall in investment return, the occupational pension scheme has to rethink on the rules and promises to employees. Due to the high operational costs and fewer opportunities for investment, many pension schemes have closed leaving members with fewer options during their retirement age. The public trust was also lost after several scandals at the beginning of the tenthly century where severe pension schemes went unpaid. Few people trust pension schemes but prefer to invest money for their retirement in other investments. Increased life expectancy has further fueled the crisis during the twenty century. In 1950, the life expectancy was 65 years; however, this age has increased by 12 more years today (Cutler & Waine 2013, p. 334). Further, the birthrate is falling, and we have a rapidly aging population. This means that every year more people are retiring compared to the working class who are paying taxes to support them. As a result, the government has more responsibility for helping the aging community. Due to the scarcity of resources, the government is let with few option of either increasing spending on the state pension or individuals are encouraged to save more. According to Cutler and Waine, the expectation that people will spend more money on pension is highly unlikely (p.334). Due to the loss of public trust on the pension schemes, people will not save money. As noted by the British Insurers, Britons are saving an estimated £27bn a year which is too little to support the aging people today (Collins, Podger & Keyong 2014, p. 224). Consequently, few people are paying taxes to be used to maintain the aging pensioners. Some firms have decided to abandon the pension guarantee because they cannot be able to handle the increasing pension expenses of the aging community.
Reason for Changes in the pension industry
Many factors have contributed toward changes in the pension industry. They include the need to restore public trust in pension schemes so they can save more. The UK pension schemes have come under fierce criticism due to the public scandal that has led to lose of public trust. For instance, in 1991, Robert Maxwell who was a media tycoon withdraws £440 million pounds from the pension funds of his employees (Taylor-Gooby 2014, p. 225). This money belonged to thousands of his employees who worked in his Mirror Group Newspaper such as the Sunday Mail. He died in 1991 in mysterious circumstance leaving his two sons with bankruptcy debts of more than £400 million pounds (p. 224). All his employees were left with small pension due to his fraud which sent a shockwave through the pension industry as employees confidence as lost. To prevent such cases from occurring, the government has developed new policies governing pension schemes.
Economic factors have also contributed towards new regulations. Due to the increasing number of people who are aging, the government reviews the State Pension system in order to reduce state expenses. The government has changed its State Pension Age by introducing a second pension scheme which is in line with the market prices. Many people feel that these changes should not be implemented because they will affect their retirement benefits. For instance, many people are worried that they will pay pension for many years only to face an impoverished retirement. Due to the high cost of operation coupled with a fall in investment return, occupational pension scheme has to rethink on the rules and promises to employees (Lindsay & Kellett 2015). Due to the high operational costs and fewer opportunities for investment, many pension schemes have closed leaving members with fewer options during their retirement age. The public trust was also lost after several scandals at the beginning of the tenthly century where severe spate pension schemes went unpaid. Consequently, few people today trust pension plans. However, they prefer to invest money for their retirement in other investments.
Local UK pension schemes have wasted millions of pounds due to poor management and scandals. This practice has prompted the government to develop new policies that will ensure compliance and transparency. According to government data, there has been a vast discrepancy in the fee paid by pension schemes from the local Government Pension Scheme (Disney, Emmerson & Wakefield 2014, p. 221). A critical analysis of LGPS date shows that pension schemes have been squandering millions of taxpayer’s money as excessive fees. This has prompted a public outcry for more transparency and accountability in the pension industry. The government has responded by developing new laws that require pension firms to be more transparent and accountable. Moreover, the government had set up a second pension plan for those who lost money when pension companies collapsed at the beginning of the twentieth century.
The government has changed pension regulations due to a spate of companies claiming insolvency. This has resulted in thousands of people’s pension promises going unpaid. The UK government has been trying to adopt new regulations that require employers to top up money for their employees when needed. This will prevent situations where thousands of people are left with severely reduced occupational pension. For instance, the government has developed a two scheme to help workers to save in a defined contribution scheme. This scheme is more acceptable to the public because it is highly unlikely the government will go insolvent. Therefore, it is advisable for students and the new working class to start saving as early as possible.
Benefits of changes in the pension industry
One of the major changes in the pension industry is the introduction of a system where employees can access their personal pension without the need to pay an annuity. The new changes were to be implemented at the beginning of April 2015 (Tully 2015, p. 23). Employees can now withdraw what they want to their pension plan without restrictions. However, this policy can only be applied by those who qualify for ‘flexible drawdown’. Not qualifying for drawdown is not enough reason not to be in a pension plan because you can be allowed to take your entire pension without paying any annuity. For instance, if an employee has a pension fund of £50,000, they can be permitted to withdraw up to £12500 as a lump sum and the rest as a taxable payment (Booth & Niemietz 2014, p. 142). This has encouraged more people to join pension schemes to save toward their retirement. Moreover, young employees are invited to join pension schemes because they can now be able to withdraw their pension without paying any annuity. Before this changes came into effect last year, savers had freedom to withdraw 25 percent of their pension tax-free. However, savers were being subjected into buying an annuity with the remaining balance in the pension scheme. However, now saver over the age of 55 can be allowed to take small lump sums from their savings without buying an annuity (Crawford 2015, p. 1). This policy will encourage the upcoming working class and students to start saving. The benefit of these changes is that those who have substantial pension savings now have the liberty to avoid the 40 percent tax.
Conclusion: Recommended alternatives for retirement via a pension scheme
There are varies way in which young workers and student can be able to enroll in an alternative retirement plan via pension schemes. However, employees will be able to access these options if they are members of a defined contribution pension. They include final salary schemes, drawdowns, and transfer value. Young employees and student who are in a pension plan can be able to access final salary scheme by transferring their money to a transfer scheme. This is a very interesting alternative via a pension because it allows workers to reap tremendous benefits from their investment in a pension. For instance, if a worker has an anticipated pension of £16,000 in a final salary scheme they can be able to obtain more than £350,000 as a one-off payment (Ring 2015, p. 73). Usually, final salary scheme members can be able to calculate the amount they will receive at the end of the period by multiplying by 25. Benefits plan this effective retirement because it also includes dependant’s pensions and annual increases. As noted by Béland and Waddan (2014) these benefits are important especially at old age because they allow people to have more money for investment after retirement (p. 394). In case the saver dies, the final salary scheme pays, at least, half of the membership fee to the spouse or family for the rest of their life. The payment is inconsistency with the same inflation rate the member had been receiving. A final salary scheme is one of the best opportunities for investment toward retirement that should encourage young people to start planning via a pension scheme. It will help them not only to secure their spouse well-being but also their children and grandchildren when they die. For instance, if a person starts saving in a final salary scheme for 65 years with a pension of £12000 then, they will be paid £7000 if they die at 87 (Robertson 2016, p. 33). Moreover, this money would also include additional inflation increases each year to the family of the saver.
A drawdown is another alternative that allows people to save toward their retirement via a pension scheme. A drawdown is an agreement where pension income is invested in a tax-free environment and generates incomes over time. Although withdraw from this investment is subject to tax, spreading the income over a long time reduces the impact of taxes payable on a single withdraw. Although the drawdown has been there for many years, many people could not access the option because they were required to save more than £20,000 per year. However, the new changes in the Pension Act 2015 have reduced this money to zero (Curry 2014, p. 241). Therefore, no one has any excuse not to be part of a pension scheme. The most interesting thing about the new changes in the ability of individual to get full access of uncapped drawdown without having a particular level of income. This policy will benefit the young people especially students and the young families who intend to save toward their retirement. Experts reckon that individuals who opt for drawdown should ensure they do not deplete their investment too quickly. They recommend savers to only draw 3.5 percent of their capital per year (Lawson 2015, p. 87). This will help them to save their money for a longer time. Moreover, if a saver dies before drawing all the money, they can leave the balance to their spouse without paying inheritance tax.
Finally, the transfer value is an exciting alternative of investing toward retirement via pension. This option becomes available if a saver finds drawdown and salary scheme complicated. This alternative is recommended because it put more effort into calculating the correct transfer value. Furthermore, this option does not consider the marital status of the saver or the detailed health data. This alternative is best suited to those who are single or ill health because it allows them to receive more benefits they would not have been entitled to, such as spouse pension (Morris 2015, p. 52). This is the best option for students and young working class who are single. With all these options available, there is no reason young people should not enroll in a pension scheme. Therefore, students are encouraged to save in a pension plan because it will help them to secure a comfortable life after retirement.
In summary, there are many alternatives to invest for retirement. However, it is recommended that young employees who want to use alternative methods via a pension scheme to consider using drawdown, final salary and transfer value. It is imperative to start saving at an early age for your retirement in order to be financially stable after retiring.
References
Béland, D, & Waddan, A 2014, ‘Policy change in flat pensions: Comparing Canada and the UK’, Canadian Public Administration, vol. 57, no. 3, pp. 383-400.
Booth, P 2015, ‘The young held to ransom – a public choice analysis of the uk state pension system’, Economic Affairs, vol. 28, no. 1, pp. 4-10.
Booth, P, & Niemietz, K 2014, ‘Privatising Pensions in the UK: How to Restore Contracting Out’, Economic Affairs, vol. 34, no. 2, pp. 139-153.
Collins, PD, Podger, A, & Keyong, D 2014, ‘Public policy for pensions reform: a governance challenge for public administration and development’, Public Administration & Development, vol. 34, no. 4, pp. 223-230.
Crawford, R 2015, ‘Santander communicates through defined benefit pension changes’, Employee Benefits, vol. 23, no. 3, pp. 1-9.
Curry, C 2014, ‘The introduction of auto-enrolment and personal accounts to the UK in 2012’, Pensions: An International Journal, vol. 13, no. 4, pp. 237-245.
Cutler, T, & Waine, B 2013, ‘But is it ‘Fair’? The UK Coalition Government, ‘Fairness’ and the ‘Reform’ of Public Sector Pensions’, Social Policy & Administration, vol. 47, no. 3, pp. 327-345.
Disney, R, Emmerson, C, & Wakefield, M 2014, ‘Tax Reform and Retirement Saving Incentives: Take-up of Stakeholder Pensions in the UK’, Economica, vol. 77, no. 306, pp. 213-233.
Granville, B, & Mallick, S 2014, ‘Pension reforms and saving gains in the United Kingdom’, Journal of Policy Reform, vol. 7, no. 2, pp. 123-136.
Grech, A 2015, ‘Evaluating the Possible Impact of Pension Reforms on Elderly Poverty in Europe’, Social Policy & Administration, vol. 49, no. 1, pp. 68-87.
Hill, M 2013, ‘Labour Market Flexibility and Pension Reforms: Flexible Today, Secure Tomorow? – Edited by Karl Hinrichs and Matteo Jessoula; The New Regulatory State: Regulating Pensions in Germany and the UK – Edited by Lutz Leisering’, Social Policy & Administration, vol. 47, no. 3, pp. 346-348.
Johnson, P 2015, ‘The reform of pensions in the UK’, Annals of Public & Cooperative Economics, vol. 69, no. 4, p. 517.
Lawson, J 2015, ‘What can the UK learn from the Swedish pension reforms?’, Pensions: An International Journal, vol. 11, no. 1, pp. 81-90.
Lindsay, C, & Kellett, S 2015, ‘Assessing the Evidence Base on Health, Employability and the Labour Market – Lessons for Activation in the UK’, Social Policy & Administration, vol. 49, no. 2, pp. 143-160.
Morris, ZA 2015, ‘Disability benefit reform in Great Britain from the perspective of the United States’, International Social Security Review, vol. 68, no. 1, pp. 47-67.
Ring, P 2015, ‘“Risk” and UK Pension Reform’, Social Policy & Administration, vol. 37, no. 1, pp. 65-81.
Robertson, L 2016, ‘Pensions prudence deserves better’, Money Marketing, vol.34, no. 6, pp. 33-47.
Taylor-Gooby, P 2014, ‘Uncertainty, Trust and Pensions: The Case of the Current UK Reforms’, Social Policy & Administration, vol. 39, no. 3, pp. 217-232.
Tully, A 2015, ‘Pensions tax relief is ripe for reform’, Money Marketing, vol. 20, no. 2, pp. 22-23.
Zantomio, F 2015, ‘The Route to Take-up: Evidence from the UK Pension Credit Reform’, Oxford Bulletin of Economics & Statistics, vol. 77, no. 5, pp. 719-739.