7.3.2 Acting on and reviewing your pension plan
Once you’ve decided on the financial plan, the next stage in the model is to act on it. For most people regarding the state pension, little action is needed while it’s building up because it’s compulsory. As automatic enrolment into a workplace pension scheme is rolled out over the period 2012 to 2018, this will also be the case for most employees starting to save privately.
But the amount saved through automatic enrolment will peak at less than 8% of earnings and so may fall short of the amount required to reach the retirement income most people would like. This means that extra savings will be required. To join a workplace pension scheme or to find out about increasing the benefits from it, an employee would need to talk to their human resources (HR) department at work.
Personal pensions are more complex: choices need to be made about the provider, about how to invest the pension pot and about whether or not to get help from a financial adviser.
Acting on your plan also involves reviewing it regularly. The long timescale, the risks involved and the potential for all sorts of life changes add up to a lot of uncertainties.
It‘s also likely that the social and economic environment will change. The UK government’s phased increase in the state pension age for men and women is a good example. The qualifying age will be 66 years by October 2020 and will subsequently rise to at least 68 years by the mid-2030s. These changes will have to be taken into account by Dibyesh.
You’ve seen that Dibyesh’s real income increases between the ages of 37 and 68, reflecting progression in his career. As his income and current living standards rise, he might decide to revise his spending needs in retirement. He might decide that he wants to continue to enjoy his improved living standards and that he feels able to save more while working. For instance, Dibyesh might revise his retirement income target to become 60%, rather than 50%, of his current gross income.
Review is also essential for anyone using a defined contribution pension scheme because stock market performance is unpredictable, and the pension pot may not build up at the rate that was originally assumed to be likely.
Most pension schemes and plans issue statements yearly. This enables you to check regularly how your pension is building up, and to take steps in good time if your retirement planning is no longer on track for the income you expect to need in later life.
In Dibyesh’s case, because the return from a personal pension varies as the value of investments goes up and down, he checks each year to see if he’s on track for a real retirement income of £275 a week, and adjusts the amount he’s saving as necessary.
If Dibyesh finds that he is not on track, some difficult decisions will have to be taken. He could plan to retire later and so spend more years in paid employment building up his retirement fund. He could aim to cut back further on expenditure and save more, thus sacrificing aspects of his lifestyle now for a better income in retirement.
Dibyesh could also consider whether he has – or is likely to have – assets he could sell to supplement his retirement fund. Perhaps he expects to inherit a house that could be sold or rented out. Either way this would supplement the financial resources he has in retirement.
Whatever action is taken by Dibyesh there is one thing he must not do – do nothing and hope the problem goes away.