As 2018 ends and 2019 begins we all have mixed feelings.
Some will be excited at the prospect of a New Year with new challenges and new opportunities. There will be lots to look forward to and Spring is just around the corner.
Others will feel ‘here we go again’ and will feel the pressure of having to maintain the pace and the thought of doing it all again is stressful.
For some it will be a bit of both.
Some will have New Years resolutions and others will feel what is the point. Many New Year resolutions will last a short time but some will hold and will endure proving that it is possible to make change.
Whether we bother with New Years resolutions or not and whether we are excited, overwhelmed or worried or even apathetic about the year to come we should all take some time to think about the future and should think about the type of future we want for ourselves. New Year isn’t the only time to consider our future but it is as good a time as any.
In this article we are going to revisit the issue of planning your financial future.
We live in a time when the pace is fast, everything can be done in an instant. Instant gratification being the order of the day. From furniture stores offering to allow you to buy now and pay later, car dealerships giving you 0% finance and shops encouraging you to buy now while stocks last ‘there will never be a better price’; there is a constant temptation on us to delay planning for our future until later.
According to a recent Blackrock survey of 1,000 UK adults saving in workplace pensions found that 71% of people aged between 25 and 34 are more likely to prioritise saving for a rainy day over saving for retirement. I can’t argue with that if someone does not have an emergency fund. There are many conflicting priorities on our hard earned income but we are able to rely less and less on provision by the state in our old age.
The International Monetary Fund (IMF) has called on the UK government to consider means-testing the state pension.
Such a move, it is claimed, would make the system fairer and more affordable, with the IMF noting that means-testing would ‘improve sustainability’ and ‘safeguard the most vulnerable’.
The same idea has previously been mooted (in May 2017) by the Organisation for Economic Cooperation and Development, in order to help address the strain that an ageing population is putting on the state pension.
The IMF says: “Giving less pension to the wealthiest retirees could free up resources to finance general benefits. At the same time, similar redistribution objectives could be pursued by using the tax system (e.g. by increasing the tax burden relatively more on better-off pensioners), while preserving a simple and clear structure for state pensions.
Last summer (2017), the government outlined that the state pension age will rise to 68 between 2037 and 2039. This, though, was seven years earlier than originally planned. As a result, this change will hit everyone born between 6 April 1970 and 5 April 1978; the chances are that future governments will make further similar moves.
This to me seems a good way of reducing the burden on the state. After all we are all living longer than we were when state pensions were first introduced. The problem is when such a change is sprung when you do not have enough time to plan around it.
I sincerely hope that this does not happen. What level would the means testing be set at? Would this policy not discourage saving unless someone is really wealthy? Surely saving is a good thing. Saving, for most people, means that you need to sacrifice something you may want today in order to have something you want in the future.
Imagine if you had saved hard only to discover that you miss out on a state pension you thought you were going to get and that you are no better off than someone who didn’t or couldn’t save.
Not everyone can afford to save for the future and can barely fund todays living costs.
However, of those that can afford to save, some choose not to save. Many people are responsible savers and the government encourages saving through various tax incentives. Whether that is tax relief on pension premiums or no tax levy on growth.
Young people when starting out are naturally restricted from saving because of wages, saving for a house, being parents…. The list goes on.
Auto enrolment was a step in the right direction given the ongoing demise of final salary pensions. However, the amount being paid in is too low to replace enough of our income in retirement.
According to the recent Blackrock survey almost half of 25-34 year olds believe that 15% of their income should be paid into pension with the employer sharing the cost. This is actually a very good figure if it could be met (although it is broad brush and each individual is different). The average figure being paid into pensions at the moment is far less than that.
How much you need to save depends upon a number of things including when do you hope to retire? What level of income (in todays terms) would you feel comfortable with? What level of risk are you prepared to take with your retirement savings? What other savings and investments do you have?
I hope this article has given you something to think about. I think the lesson is that what ever you want in the future, you are going to have to plan for it. At the same time you should not blindly bank on what the state might provide and when they might provide it. You may be disappointed.