It’s Impossible to Plan Retirement with Personal Pensions

Written by Karen Bryan

plan retirementWith stories of retirement rage, where people currently about to cash in their pension pots and purchase annuities are going to get annual pension payments well below their expectations, I’m wondering if my planning for the future by paying into a stakeholder pension for the last twelve years has been a good financial move.

I’ve been a freelancer and/or self employed for last 25 years, so haven’t had access to a decent occupational pension with defined benefits. Therefore, the only option open to me to supplement my State Pension was a personal pension based on the value of the stock market.

As I can get tax relief on 100% of my earnings, up to a maximum limit of of £50 000, I could be paying in 100% of my earnings into my stakeholder pension to try to build up a decent pension.

However, as we need some of my income to cover our living expenses and I’m feeling so unsure about how the stock market will go over the next few years, I’m thinking of only paying £3,600 gross into my stakeholder pension this tax year.

Some would argue that now is a good time to increase my stock market investment. However I feel I have more control over my money but putting aside the current Cash ISA maximum of £5340. Although the interest on that cash won’t even keep pace with inflation, at least I know I can access that money when I want. This will allow me to at least partially base my decision on when to retire on my personal preference, as opposed to waiting for the stock market to provide me with a decent return.

I’m 52 years old at present, so the earliest I can access a private pension is in three years time when I’ll be 55. At the moment I’m planning to work until the state retirement age of 66, so there’s a fair amount of time to recover from the current financial lows.

I think this issue of the impossibility of planning retirement when you have a personal pension is going to come under close scrutiny with the impending introduction of the National Employment Savings Trust workplace pensions scheme. Employees earning more than the personal income tax threshold (currently £7475) will be automatically enrolled in the scheme, if their employer does not already offer a scheme which is at least comparable. However, I’m wondering if a significant proportion of employees will opt out of the scheme, due to there being no guarantees of value of the pension this scheme will yield.

I reckon that you’re fortunate if you’re in a defined benefit occupational pension scheme, where your pension’s value will be determined by your salary and years of service, rather than a very capricious stock market. For those of us depending on personal pensions to help fund our retirement, the financial outlook looks very uncertain despite our efforts to be frugal.

This article was featured in the Carnival of Retirement on 9 January 2012.