New Pension Rules Pose Pension Risk



Pensions are very valuable and extremely important for everyone;

Reforms can take a long time to come into effect and sometimes may not even happen; and

Reforms help improve the way that pensions are run

Perhaps no one else but the citizens of the U.K. can hugely identify with these statements. That’s because U.K. pensioners are in the midst of learning and abiding by new rules and regulations regarding almost every aspect of pensions, including how they can be tapped and who makes the contributions.

The italicized statements above are from The Pensions Advisory Service, which thrives to bring awareness to U.K. citizens about pension reform. While these statements are true, they are also idealistic.

In this article, we will identify the strengths and the weaknesses of the unprecedented reforms to the pension system in the U.K.

Humble Beginnings

The root of the reforms that have already begun for U.K. pensioners is quite simple – savings. Many would agree that saving is far easier said than done. There is always an attitude among too many that they’ll start later. The reasons run the gamut from believing they can’t afford to tuck a little of their earnings away, to even just being too lazy to start the process of retirement saving.

This coupled with the average life expectancy growing are making for a precarious situation for the government, which is trying to avoid a heavy burden of providing extended benefits for an aging population.

Some figures show life expectancy increasing by up to six years within a generation. So by 2030, women in England and Wales may live to nearly 90 on average, according to TheDailyMail.com. (I was unsure of your policy about using hyperlinks considering they direct visitors away from your site, but I included this link as a reference-Tedra) The site notes that men will live well into their 80s.

One of the good indications of that increase is that people will likely delay retiring. On that same note, that may mean they will also delay saving for retirement. In any case, the government thought pension reform was needed and set about revamping the system. The results are unprecedented, welcomed, and also frowned upon by some.

Many Will Receive Less Than Expected

It is estimated that roughly one million pensioners will get less than expected under the reforms.

Furthermore, only about 45 per cent of pensioners will be able to start drawing the full state pension beginning next year. Hargreaves Lansdown, a financial firm that has offered advice to pensioners, reported the figures.

While the reforms are meant to help U.K. citizens save as much as they can for retirement, there are some nuances to the reforms that many may not like. According to some of the figures released by the government, fewer than half of the estimated two million people retiring between 2016 and 2020 will get a full new flat-rate state pension of at least £148.40 a week.

Who Will Potentially Get Less

Most of those who are anticipated to get less of their full state pension are those who accepted contract work over the course of their careers. Also, affected are people who have experienced life events such as motherhood, or who were self-employed

Tom McPhail, who heads Hargreaves Lansdown’s pension research, noted that the new state pension will be simpler and fairer. However, there will be some attitude adjustments that will need to be made. He told everyinvestor.com the following:

“…in the short term it will be complicated and many people are likely to get less than they may expect. With the new pension freedoms meaning that they will be free to spend all their private pension savings, it is imperative that they receive a proper state pension forecast. Without this, they could get a nasty shock when they do reach state pension age”.

A Major Win for Pensioners

One of the perceived biggest wins for pensioners is them being allowed to withdraw as much from their defined contribution pensions, without being obligated to buy annuities. This part of the reforms began in April of this year, which was when all of the reforms began being rolled out.

In addition to being able to withdraw without from their defined contribution pensions, workers can take at least 25 percent of it on a tax-free basis.  The pensioner can still buy annuities and convert some of their money into a guaranteed income, according to high50.com.

In Conclusion

The new rules stemming from the Pensions Act 2008, like most reforms, has its positives and negatives. For the most part, they are positive because they allow for more flexibility in terms of how they choose to save.

The bullet points noted at the beginning of this article may fly in the face of millions of workers who may not receive all the money they had coming to them once they retire. Many know that reform is necessary to improve policies and regulations, however, the devil is in the details in making sure reform is fair and just.


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