Pensions are going through major changes as the government seeks to increase the number of people saving for their retirement and the industry adjusts to social and economic changes.
Automatic enrolment in a pension will come into force from 2012, with the National Employment Savings Trust (Nest) set-up to provide a pension scheme for workers where companies do not set up their own scheme.
On top of this, plans to increase the age at which people can draw the state pension were announced in the comprehensive spending review (CSR) in October and there are likely to be major changes to public sector pensions with a review by former Labour minister John Hutton making interim recommendations last month.
All of this means for many people they will pay more towards their pension, and will work for longer; by 2020 the state pension age for men and women will be 66 and it is likely public sector workers will be asked to contribute more towards their pensions.
To encourage a culture shift in the attitude of employers towards older workers, the default retirement age (DRA), allowing employers to force someone to retire at the state pension age, is being abolished. You can still choose to draw a personal pension from the age of 55.
Attitudes to pensions
At the same time, there is a danger of a crisis of confidence in the pensions sector with final salary schemes struggling to meet their liabilities and the value of pension pots hit by the recession.
In July the government changed the rules for private and public sector pension to mean they can be calculated to allow payments to link the pension to the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI). CPI generally increases at a lower rate, and the change is likely to generate significant savings.
BT announced its scheme would be linked to CPI with immediate effect (as it is a former public sector pension) reducing its liability by £2.9bn and making its deficit £5.2bn.
The results of a survey, published on 13 November, carried out by the National Association of Pension Funds (NAPF) showed 44 per cent of employees felt a pension was the best way to save for retirement but only a third felt their pension would give them enough to live on in retirement.
Figures published by HMRC for the tax year 2009/2010 showed contributions to personal pensions fell by around £1billion compared to 2008/09, potentially a sign of tough economic times, but also highlighting the challenge of encouraging people to save for retirement.
Changes in the industry
Major changes in the industry include the slow disappearance of final salary pension schemes. Latest figures from the Pensions Regulator showed that just 18 per cent of final salary schemes are open to new entrants or new accrual (increase in benefits linked to salary).
The changes in pension funds have taken place alongside increasing flexibility for investors who want to manage their own pension portfolio or just have a greater say in how their retirement savings are created.
First introduced in the early 1990s, Self Invested Personal Pensions (SIPPs) are known as a pension wrapper because they allow someone to pool their retirement investments and access the tax reliefs available on pension contributions and payments.
The government is also planning to end the requirement to take out an annuity – where a provider pays out a regular income from a pension pot – by age 75. This requirement will end in April 2011 giving greater flexibility on how pension investments can be used to fund retirement.
Self Invested Personal Pensions – taking control of pension investments
SIPPs have gradually increased in popularity since their creation with around 650,000 existing plans. Schemes can offer investors access to a wide range of options for investing their retirement savings.
Different providers will offer different investment options, with low cost options available through SIPPs via investments in funds with lower annual management charges, such as passive or tracker funds.
The rules around SIPPs allow these various investments to be made within a single scheme, which can include investment in commercial property, commodities and global economies.
One of the main aspects of SIPPs, public policy changes to encourage retirement savings and the removal of the annuity rule, is a shift towards greater individual responsibility for retirement funding.
As well as the flexibility offered by a SIPP, investors take on the responsibility for their investments and can alter their investment strategy depending on market conditions and their needs.
Charges and options can vary depending on the SIPP provider and funds invested in, so you should look at the options available and charges that apply before investing through a SIPP.
Investments in SIPPs can go down as well as up, and may not be suitable for everyone, so you should be fully aware of the risks before making a decision to invest.
© Fair Investment Company Ltd