When pension income is not enough

Hands of our pensions poster
With the news that the Arcadia Group has called in administrators some 10,000 or so employees who are members of their defined benefit pension scheme will now be faced with having their pensions paid by the Pension Protection Fund (PPF). The PPF was established largely in the wake of the Maxwell pension scandal of the 1990s to provide some form of compensation to members of schemes when the employers sponsoring those schemes go into financial difficulty or become insolvent.

The effect of moving to the PPF for employees is a measure of security but for that they will see a reduction of 10% or more in their expected retirement income and possibly more importantly, a reduction in annual inflation-based increases. This is at a time when the staff may also lose their jobs. The latest news is that thousands of employees at Debenhams in their defined benefit pension scheme may also find their pensions moving to the PPF.

This leads me to the point I would like to make in this blog. It is simply this. We should not rely entirely on pension income provided by the State or employers to support us in retirement. For many people, particularly those fortunate enough to have retired in the last two decades with defined benefit pensions based on their final salary, their pension income may well be enough. But life is now very uncertain and all employers including the State are faced with hugely increasing pension costs that are frankly unsustainable in the long term.

Arranging income from investments

The solution is to put funds aside into investments that will provide additional income to support us once our working life is mainly over. We can, of course, fund our own pensions in addition to those provided by the State or our employer.

Whilst I would always encourage this we need to be careful not to put all our eggs in one type of investment, in this case pensions. Pension rules can be changed, and frequently are, at the whim of the government. We have seen women in particular have to wait another six years to obtain a State pension. The earliest you can access a personal pension goes from age 55 to age 57 in 2028 and so on.

What you need is a portfolio of investments outside of your pension that will be unaffected by changes to the pensions rules. These can then provide additional income for you when required. There are many ways to do this. Some are more tax efficient than others.

Some investments produce a true income and others simply make withdrawals of your capital. One is not better than the other. It all depends on the level of income you require, your tax situation and your attitude to risk.

Please refer to a new section of my website which looks at some of the most popular ways of obtaining an income from your investments

Arthur Childs

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