Don’t mention the ‘P’ word
Several years ago, when taking part in my first live radio broadcast, I was instructed by the presenter of the show not to mention the ‘p’ word during the discussion we were having about retirement planning. The ‘p’ word in question was, of course, ‘pension’.
Apparently it is a word that puts people off planning for their future. The presenter of that radio show certainly thought so, and this is backed up by new research from AXA which suggests the word ‘pension’ puts people off. They have gone as far as teaming up with the Collins English Dictionary in an attempt to find a new name for ‘pension’.
Can a name really influence our decision to save or not to save to fund our expenditure in retirement? I suspect it is a bit more complex than that.
For some people, there is nothing daunting about pension plans. They understand that pensions are simply a tax-efficient investment wrapper. What really matters is where you choose to invest the money within your pension plan or, in the case of defined benefit (so-called ‘final salary’) pension plans, the benefits you are accumulating.
Sure, there is some necessary complexity involved with pension legislation. Most people do not need to have a detailed working knowledge of the various tax rules and regulations surrounding pensions in order to use them to build a fund for retirement. They can instead rely upon their financial adviser to point them in the right direction. It is typically higher earners, those with significant pension fund sizes and people with complex income structures who need to get involved in the really complex bits.
Apart from knowing that it is where you invest your pension fund that makes the real difference, it is important to have a reasonably good understanding of what your pension fund is likely to produce in retirement, in terms of both capital and income. In simple terms, this means the ability to take up to a quarter of your pension fund as a tax-free cash payment when you retire. The remainder of the fund is then used to generate taxable income for the rest of your life.
There were some major changes to the pension rules back in April 2006, with the intention of making them simpler to understand, and therefore more attractive. Consensus within the financial adviser community is that this ‘pension simplification’ mostly failed to achieve that aim. For advisers, the rules are now mainly easier to understand. However, as with all new legislation, the unintended consequence of change was the introduction of some even more complex factors.
Another reasonably big change is coming up soon, on 6th April 2010. From this date, the minimum age at which you will be able to take benefits from a pension is being pushed up from 50 to 55. Unlike other changes to pension ages in the past, this is not happening in gradual stages but in one go overnight. For people who are over 50 but under 55, this will mean a wait of up to five years before they can access the cash from their pension funds, until they reach their 55th birthdays.
We expect more changes to be introduced to pensions in the future. The current system is failing to encourage sufficiently large numbers of people to save for their own retirement. As part of their campaign, AXA was looking for suggestions to replace the word ‘pension’. My suggestion was Later Life Survival Fund, shortened to LatLifSurFu. It might appeal to younger people who are turned off by the word ‘pension’. The alternative – retiring without a LatLifSurFu – doesn’t really bear thinking about.
Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow him on Twitter @martinbamford.
