It’s that time of year at work again – the time where we decide what benefits we want to buy with our benefits fund. As usual, the debate around pensions has started again focused on how much people are considering contributing. I definitely believe this is a personal choice and have to resist the urge to shout “Are you crazy?!!!” when a colleague boasts that he never responds to the benefits selection call, instead he just goes with the company default. Talk about letting someone else make your money decisions! (As you can probably tell I struggle to hold back on preaching financial education when I hear crazy things like that. I guess once you’ve been woken up to the necessity of taking control of your finances and your future it’s difficult to go back to sleep-walking).
Now the general consensus is that we all should be contributing as much to our pensions as possible. Plus points include:
- The benefit of the company match (e.g. if you put in 1%, the company will also put in 1% – so it’s like getting 2 for the price of 1 in this instance).
- Tax benefits – the tax and national insurance you would have paid on the contributed earnings are also added to your pension pot.
I like all of these things, given that I’m all for maximising my money, but there are a few things that make me question how much I should contribute to a pension.
My conflict with the UK Pension system
State Pension age is on the rise. For the grandparents it was 65 years old (60 for women), for my parents it will be 67 years old and currently for my age group it’s set at 68. At £115.95 per week you won’t get very far with state pension alone. Why does this matter?
Generally the earliest you can draw from your private pension is age 55 (10 years before state pension age). If you withdraw money before this minimum age you could incur significant penalties (currently 55% tax on the amount drawn early). So here’s where my issue lies…if state retirement age is rising, the point at which you can start drawing from any other pension pots (without significant penalty) is also on the increase.
Maybe it’s the Millennial in me, but given the prior age hikes and the ageing population, I wouldn’t be surprised if there were further increases from those stated above. With this in mind, focusing all of my retirement efforts around locking a significant chunk of my earnings away for roughly 30 years has never really appealed to me. It seems that, despite the financial landscape being very different for Millennials versus prior generations, we are pushed to follow the same model (work hard, contribute to pension, retire).
Retirement – A right or a privilege?
Many people believe that we should retire, with some even going as far to call it a right. In some parts of the world parents work until old age. When they can no longer work their children become responsible for looking after them. In other parts of the world (including the UK) the norm is to work for a number of years, up until a certain age and receive a pension to cover your living costs when no longer working.
The changing nature of pensions:
- Defined benefit pensions – what schemes used to be. Involved a degree of certainty over the amount you would receive (normally referred to as “final salary” or “average salary” pensions). Most (if not all) are closed to new entrants. If you have one, hold on to it, they are like gold dust.
- Defined contribution pensions – what most schemes are today. The only certainty being how much you put in. Your pot is then invested with the final sum on retirement dependent upon how well those investments have performed.
In light of this change many may find themselves continuing to work or having to look to children/other family members for support as they reach retirement age, due to pension pots being less than they hoped for.
The reality is that retirement is a privilege; one that not everyone will be in a position to afford – each person will need to put plans in action to achieve it.
What does retirement look like for me?
It’s all about the freedom to choose how I spend my time (well before the age of 68 – the aim is 45).
Most of us have to spend a chunk of our day at work for money. So in order to choose how I spend my time my living costs need to be covered whether I work or not. This means putting money to work in areas that generate income streams whether I’m present or not such as property, businesses, stocks & shares.
Despite my conflict, I still make a contribution to a pension (one in which I can manage the investments), with the view that if for any reason I don’t get to use it someone in my family will benefit. I just don’t believe that it should be the sole focus when it comes to providing income during retirement.
What about you?
What does retirement mean to you? Are you seeking early retirement? If so, what are your plans to achieve it?
PIN IT FOR LATER