Should you save for a pension yourself or rely on the State?
David Kuo's latest prediction for 2012 is a pretty depressing one, with his belief that pensioners are likely to be worse off in 2012 than they were back in 1980.
David reckons a single person could expect to receive a state pension of £106 per week that will be around 20% of average income, so not much. (You can read his prediction in more depth here by downloading our free report.)
Clearly with such scant state pensions to look forward to we should be looking at saving for retirement ourselves. But saving enough to make a real difference can be tricky. For example, the average pension pot, come 2012, could hold around £34k. But although that may sound like a lot, it would actually only produce an income of around £2,400 a year (depending on the age and circumstances of the pensioner.)
Means-Tested Benefits
What's more, anyone on means-tested benefits (such as pension credit and housing benefit) may wonder whether squirreling any precious cash away into a pension is worth it in the first place. That's because low to moderate earners could find that a private pension pot affects their eligibility to claim benefits, so they could end up with less money overall!
Unbelievably, rather than encouraging us to save for retirement, the government may have put many of us off. That's because any income you receive from a private pension is taken into account when a bureaucrat decides whether you're entitled to means-tested benefits. So saving money into a pension could potentially reduce any benefits claimed and make you worse off.
Personal Accounts
Indeed, this situation has unsurprisingly created a lot of resistance to saving for retirement amongst low to moderate wage earners. What's more, it goes against the government's idea of Personal Accounts, which when introduced in 2012 are designed to encourage all of us to save for retirement.
These accounts auto-enrol us into employer pension schemes where we will have to contribute 4% of our salary, with employers paying in another 3% and the government topping up by a further 1% through tax relief (unless we specifically opt-out). The aim is to get each of us to start healthy retirement funds, no matter how much we earn but if this affects means-tested benefits and reduces the income of lower earners, is there any point?
Pension Income Disregard
Clearly the situation isn't going to work unless something changes. And the Pensions Policy Institute (PPI) has suggested a solution. Calling it 'Pension Income Disregard' it proposes the government 'disregard' the first £12 a week someone receives from a personal pension when calculating their eligibility for means-tested benefits.
This would effectively mean that a single person could have a pension fund worth £6k, without it impacting any benefits received, which certainly seems a lot fairer than the current system.
So should you save for a pension?
In spite of this issue with means-tested benefits, the answer for me is 'yes.' Remember that anything could happen in the next ten, twenty, thirty, forty or fifty years. Who knows what kind of state pension (if at all) we could each have to look forward to?
If you want to be sure that you'll have something to live on when you retire, you need to save. A pension is a good savings vehicle due to the tax breaks but don't forget you can also save for the future within Cash and Share ISAs. Even good old savings accounts could have a place in your retirement portfolio. Start planning today and aim to improve your own retirement as much as possible. Then you won't have to be reliant on the whims of politicians and civil service bureaucrats.
>You can read more about pensions at our Retirement and Pensions home page.
This article first appeared in an email.