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Changes proposed to pensions forecasting

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Thursday November 15, 2012 at 9:00am
Some news last week will be of particular interest to anyone already with a personal pension or thinking about one.

Pensions regulator the Financial Services Authority (FSA) announced it wants to move to inflation-adjusted illustrations for personal or stakeholder pension schemes and is currently consulting on its plans with a target start date of April 2014.

What does this mean? Effectively it will ensure that the effect of inflation is taken into account when forecasting pension performance and the pension holder will have a clearer view of their likely pension on retirement.

This won’t physically touch your pension fund but it will change the forecast value. And so when you get your pension statements from 2014, they are likely to show a significant reduction in the forecast value on retirement compared to previously. The pension pot around which you’ve been planning your finances for old age is likely to look a lot less healthy if inflation-adjusted illustration proposals by the FSA come into effect.

This news might reinforce the myth that pensions aren’t a wise use of money when it comes to old age provision. But it’s important to note that inflation affects other forms of investment and savings as well – so there is no single risk free route.

Pensions are still only as risky as you want them to be and are less risky than relying entirely on the sale of your business or family home to fund your retirement, as these are at the mercy of the property market and economy at the time – both of which are affected by inflation.

There are added benefits only pensions provide. The big advantage is that contributions are made out of pre-tax earnings, so in effect the tax man actually adds to whatever you pay in while you build up your pension pot. And when you retire, when taking pension income 25 per cent of fund value is taken tax free and the balance is taken as an income taxed at the member’s tax rate in retirement. Some pensions can also be set up to provide for dependants on the pension holder’s death.

Although the FSA changes may feel like a bitter pill to swallow, in the long run it is far better to forecast on a more likely, worst case scenario than not.

This does however make it even more important to review your pension provision sooner rather than later. For those with a pension why wait until 2014? Instead act early to address any potential shortfall in the income you hope to get on retirement. And for anyone still putting off their pension, there is an increased impetus to act now.
An independent financial advisor can help you review what you want to invest and the level of risk you are prepared to take.

Andy Parker
Chartered Financial Planner and Financial Advisor, Birmingham

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Parker Chartered Accountants and Financial Advisors is the trading name for Parker Business Development Ltd (Registered No. 4116664), Parker Tax and Trust Ltd (Registered No. 06950353) and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here