The most important factor when choosing to manage your personal finances effectively is time. A greater time investment will almost always result in a greater financial return.

Therefore the sooner you start to manage your finances, the greater return and financial ease you will feel in the future. Many people fail to plan ahead, which results in struggling to juggle finances at a later point in life.

Money management should focus on four primary questions:

1.       What financial goals would you like to achieve?

2.       When can you expect to achieve them?

3.       What finances do you currently have?

4.       What level of risk would you make to achieve these targets?

Choosing somewhere to live is an essential in everybody’s lives, and therefore, buying a house will be the biggest financial purchase that people will make. The financial investment into a home will affect all your other finances.

Making big decisions on your lifestyle will affect your financial goals. If you consider a luxury holiday to be one of life’s essentials, you will have less money left over for savings and investments.

When do you want to retire? What expenses do you currently have? Deciding what your priorities are will help to determine what money you will have left.

It is worth assessing your current liabilities, as these expenditures and assets could be reduced or sold and free up money for the future.

Calculate how much spare money you have so that you can form an investment plan. Investments can vary dramatically. Some are high risk for higher reward or loss, and some are low risk for a steady growth on investment. It’s up to the individual to decide what level of risk you are prepared to make.

Once these considerations have been made and your plan is in places, it’s important to assess the decisions you’ve made and how they affect you on a day to day basis. You plan may be too restrictive, leaving you with not enough money to live on, or perhaps you could make greater short term sacrifices to benefit you in the long term.

A small amount of time spent on your current finances can be highly rewarding for your future.

Lord Turner believes his report regarding future pensions was not radical enough, arguing that the age at which people should receive pensions should be raised more quickly.

He also suggests that those in the public sector should have more flexible pensions.

Four years ago the government used the same report to plan their current policy.

In the coming decades, the age at which people can start collecting their pensions is getting later according to the recommendations in Lord Turner’s Pensions Commission.

People will still be able to retire earlier than the legal pension age, but will not be able to seek state pensions until this point.

In 2024 men and women will have to be 66 in order to receive state pensions. In 2034 this will change to 67, and in 2044 this will rise again to 68. Each rise will be phased-in over two years.

Pension Stability Must Be Solved

However, according to Lord Turner, there are arguments for the state pension age to go up to 70 by 2030.

He said: “If I was redoing my report I would be more radical, arguing for an even faster increase in the state pension age.”

There were also other recommendations made in the policy that are set to become law. This includes the view that increases in state pension age should be linked to rising life expectancy, as well as the idea state pension be linked to average wages, not prices. Also, the introduction of ‘personal accounts’ for those who can’t access a company scheme.

Current economic problems have also forced the strength of company and public sector pension schemes into view.

Deficits are mounting and numerous household name companies have had to close their final salary schemes to new and existing members.

This has led to questions about public sector pensions, but unions and staff argue workers were paid less than jobs in the private sector so decent pensions are part of their employment package.

Public Sector Pensions Fair?

Lord Turner says public sector employees may have to commit to a scheme that’s based on retirement income on an average of their career salary, not their final salary.

“We have to make it sustainable and we have to make it fair. I think it should move to average salary from final salary,” he said.

Life expectancy is important in making pensions fair to different generations as we are unaware now of any major medical breakthroughs that may happen in the future that increase life span.

A Department for Work and Pensions spokesman said “Our bold changes to the state pension system respond to the demographic changes in society. They will ensure the state pension system is sustainable and affordable for the future.

“We have also taken steps to reform public sector pensions to ensure they are affordable into the future. These include ensuring new entrants to the civil service enjoy a pension based on a career average and a retirement age of 65.”

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A survey by Gfk NOP has revealed that half of adults between the age of 20 and 60 are not saving for their pensions.

The survey consisted of 1,358 participants and shows that those under 30 are the worst, with only about 36% putting towards a pension scheme.

It seems that the main reason for this is affordability, with many people using their spare cash to pay off debts rather than save for their future, especially among the youngest.

Those aged 41-60, just under half, 45% are not putting towards their pensions. For reasons which range from people having been made redundant to women who never joined a scheme due to leaving full-time work to have children.

One interviewee aged 25 is an architectural assistant living in London, who admits that a pension is low on his priority list, saying: “I haven’t given a pension any thought.

“At the moment I’m just trying to keep down a steady job. I was made redundant because of the recession and have had to take a pay cut.”

Spend Now, Worry Later

Many other young people say they haven’t started a pension scheme because they don’t know how to and felt retirement was too far away to worry about now.

Even though only 36% of respondents below 30 reported having private pensions, half of people in this age group who took the survey said they were confident they would be able to live comfortably when they retire.

Ed Gardner, the chief executive of UK retirements and savings at Metlife said that young people were wrong to assume that this would be the case. He says that more and more final salary pension schemes are closing to new members. Young people will now have to rely on defined contribution pensions which generally provide less return.

Future Invested In The Internet?

Even so, according to the study, 45% of 41-60 year-olds also don’t have pensions, when retirement is becoming an immediate concern.

One such example is Andrew Knowles and his wife Rachel in their 40s. Mr Knowles has previously paid into several pension schemes, but has recently been made redundant and therefore chose to set up his own business. His pension won’t allow him to retire at 65.

His wife is a chartered accountant, but has not been putting anything towards her pension since the birth of her four daughters.

Mr Knowles says: “I think the internet will offer a lot of opportunities for ad-hoc home based working [for people above working age].

“I’m disillusioned with the general financial system and pensions are part of that. We will be doing some kind of work well into our 70s. We accept that’s where we are, because we haven’t got the pension provision.”

Mr Gardner says people should think about how much money they will need to retire at 65, expecting to live a further 25-30 years. He predicts that many people are not currently saving anywhere near enough.

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The Pensions Regulator has warned that the recession may be putting pressure on the pensions scheme making it more prone to be at risk from fraud, dishonesty and risky behaviour from employers.

It is asking that trustees, advisors and members to use their powers to tip off anything that may be considered fraudulent.

They also say that though fraud and dishonesty are unlikely in this situation, it is still a risk and therefore people should be aware of employers trying to abuse the pensions scheme.

Joanne Segars of the National Association of Pension Funds (NAPF) said: “It is important to make clear that the vast majority of schemes are well run by dedicated managers and trustees working on behalf of members.”

Dishonesty Could Jeopardise Peoples Benefits

The regulator’s chief executive has also said that he wants to hear from people that can give any information about this that may be suspect. He said: “The economic downturn may accentuate the vulnerability of some schemes to certain actions which give us cause for concern.

“We encourage all those who might be aware of behaviour that would give cause for concern to contact us.”

The TUC have welcomed the announcement saying that “this is a helpful reminder that those involved in running pensions should remain alert to the potential for rare cases of fraud or dishonesty that could jeopardise members’ benefits.”

The regulator’s alert has highlighted two particular areas of concern: “scheme members may be targeted to access their pension assets through trust-busting or pension liberation activities.”

Increase in Fraudulent Claims

It also gives some potential examples of employers that play fast and lose their pension schemes, including “avoidance of employer debt, inappropriate transfer for individuals from under-funded schemes that would not subsequently have the resources or adequate employer support, as well as employer-related self-investment and poor practice associated with transfer incentive exercises.”

The regulators spokesman said that there had been a slight increase in examples of people reporting breaches in the pensions laws in the past financial year: “there has been a marginal increase in the number of whistle blowing cases reported.”

Just a couple of months ago the regulator warned employers not to use the recession as an excuse to cut pension contributions if they could pay dividends to shareholders, after it had already warned that pension scheme finances were being undermined by falling investment returns and higher risks of employers going bust.

From the law firm Sackers, Peter Murphy said: “unusually, the regulator specifically refers to the possibility of dishonesty and fraud affecting pension schemes.”

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The government have predicted that the Retail Price Index will show a year on year drop by the autumn, of up to 2%, which will affect the annual rate of personal pensions.

Were this to happen, some providers have said that they will reduce the payments on index-linked pension annuities.

Despite the fall, the government are promising that the basic state pension will rise by at least 2.5% even if the year-on-year prices fall.

Tom McPhail of financial advisors Hargreaves Lansdowne had the following to say about which pension annuities would be cut if inflation falls below zero.

“Axa, LV, Partnership, some of Standard Life’s annuities, some of Prudential’s annuities – these companies have said if RPI goes negative and you have one of these annuities, then your payment will go down.”

He added that others will not make the cut: “Norwich Union, MGM, and Legal and General have said your payments wouldn’t go down, they would just stay flat until RPI went back up above where it was before.”

Effects Will Start to Show Sooner Rather Than Later

It is thought that the Retail Prices Index may go negative as soon as March, which may affect some people very quickly.

Mr McPhail added that: “Generally annuity providers use the RPI figure three months before you took the annuity out. So if they go down this month that will affect people who took their annuity out in June last year.”

For those with state pensions, the news isn’t as bad.

State pensions are linked to Septembers RPI, and though the government has predicted that the RPI will fall to below minus 2% in the third quarter of 2009, they have also said they will not raise state pensions by less than 2.5% in April of next year.

However, they are not making such promises for people with Child Benefit, Jobseekers Allowance or Disability Benefits. If the annual rate of prices falls, these benefits will be frozen.

Another thing that will freeze if prices continue to fall is company pensions paid to retired workers from the public sector.

Tom McPhail said: “The odd one could [be cut] but it would save them very little money and upset a lot of people. So with a company pension you’re probably OK.”

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As the Bank of England injects £75billion into the economy, this could have an adverse effect on annuities of those retiring.

Annuities – regular income from a retiree’s pension pot – are paid by insurance companies, the amount of which is based on the yields made from government bonds or gilts, which have dropped dramatically after it announced on Thursday it planned to create £75billion to buy these gilts.

The annuity of a £100,000 pension pot now stands at up to £6,488 per year, nearly £400 lower than the average of a joint life annuity last year. However, this is still higher than when it dipped below £6,000 in 2006.

Annuity rates reached a 6-year high in the summer of last year, but have dropped 8% since.

Retiree’s at the peak last summer would be able to convert their pension savings into a much higher income for the rest of their life than someone planning on retiring now.

17-Year High for Bonds

The announcement about the plan to use quantitative easing has meant that price of government and corporate bonds has hit a 17-year high.

However, the interest from these bonds has also significantly fallen, which has reduced the amount made by pension funds, therefore cutting the amount that will be paid out to retiring investors in annuities.

Representative of Hargreaves Lansdown said: “annuity rates have been falling quite substantially in the last four of five months.

“However, the £75billion, which is a huge sum of money, is only going to add to the retiring investors’ woes.”

He also recommended that those planning on retiring in the near future shop around to find their annuity, or possibly even split their pension pot and spend some now and some in annuities later.
He also advised that he expects the annuity rate to fall further still before it gets better.

Chancellor Alistair Darling has given the Bank permission to extend the £75billion cash injection up to £150billion if needed in the future, with the idea that commercial banks will find it easier to lend money to consumers if the amount of money in the system in the first place is boosted.

Great for the Young, A Potential Disaster for the Old

Deputy governor of the Bank’s Monetary Policy Committee, Charlie Bean has said the effect of the policy will be closely monitored, admitting to a “a good deal of uncertainty” over the impact it will have, including  a chance of inflation in the future.

However, the Institute of Fiscal Studies has reported that inflation for pensioners is already rising.

The director general of Age Concern has warned: “as younger people enjoy the benefits of the lowest levels of inflation for decades, older people still find much of their income is swallowed up by high food and fuel bills, forcing many to make drastic cutbacks.”

He added that it was important for pensioner to claim back all benefits they are entitled to, to see them through this period.

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According to the official pension scheme safety net, the collective deficit of the UK’s final salary pension schemes hit £195 billion in December 2008.

Figures released by the PPF (Pension Protection Fund) shows that deficit rose by 43% after it hit its previous record of £136 billion in November last year. This compared to figures just one year ago, whereby the 7,800 mainly private sector schemes measured by the PPF had nearly £12 billion surplus.

The rise in the cost of paying pensions in December far outweighed the value that scheme assets rose by.

The PPF have said that: “During the month of December 2008 there was a 3.6% increase in assets due to rising UK and global equities.
“Meanwhile, lower gilt yields in general led to an increase in liabilities of approximately 10%”

Funding for the pension schemes is extremely fickle, shown by the fact that only 11% of schemes (a total of 823 schemes) were surplus last month, when as recently as March last year 3,000 schemes had been in surplus.

The dramatic difference in numbers has been mainly attributed to the international credit crunch, worldwide economic slowdown and the slump of share prices that has inevitably fallen alongside this.

On top of all these things, there has been a poorer return on bonds, which are used to work out the value of the assets that the pension scheme need to be able to pay pensions in the future.

The PPF also said that: “Over the year to December 2008, the FTSE All Share Index fell by 32.8% and 10-year gilt yields were down by 116 basis points.”

All this means that UK employers have yet one more financial problem on their plates to worry about as the economy goes into a recession.

Whenever a scheme that has been revalued and revealed to be in deficit by its actuaries, the employer must put a plan in place in order to restock the fund with  extra payments and usually bring it back to surplus within a decade.

However, last month the PPF and the Pensions Regulator warned that the final salary scheme was becoming more and more risky. One of the things they pointed out was the declining value of scheme assets, and also the rising possibilities that more firms will go into administration, and eventually going bust next year, which would leave a huge hole in their pensions funds.

Woolworths pension scheme became one of the biggest calls yet on the PPF last December, when the chain of stores closed, and the company’s pension scheme was £147 million in deficit.

The Post Office has decided it will continue running its card account which distributes benefits to 4.3 million claimants.

Private firm, PayPoint, had proved to be competition for the running of the Post Office Card Account; however, ministers have now decided to close the bidding process.

PayPoint have said they are “disappointed by this decision”.

The National Federation of Sub Post Masters had warned that if the contract was lost, up to 3,000 post offices could close.

James Purnell, the Work and Pensions Secretary, has told MP’s that he would do “nothing to put the network at risk”.

The system was originally brought in so that giros and payment books for pensioners and benefit claimants could be ended, while allowing them to still use post offices to collect their benefits.

The announcement from Mr Purnell came two weeks earlier than expected, after criticism from MP’s that delays in the decision were “destabilising”.

Mr Purnell also said that the account was “central to the viability of the network” and added that the next contract would initially run from April 2010 to March 2015, but could possibly be extended after that point.

Some lawyers have said they have concerns over the possibility of legal action as a result of the decision, as well as a chance of an EU investigation into how the process to re-award the contract was conducted, even thought Mr Purnell is denying that the matter was mishandled.

In an interview with BBC Radio 4’s PM he said: “The circumstances have changed because of the current financial situation. It means that people are even more reliant on the Post Office than before.
“It’s a social service which people look forward to visiting. It is often at the heart of local communities. We can’t ignore the fact that the world has been changing.”

The chairman of the Treasury Select Committee, John McFall, has said that the government could be “accused of prevaricating” over the contract after they felt obligated to put it out to tender. He added that the ministers had made up their minds about the importance of the Post Office as a social business.

Unions that were involved in representing postal staff are pleased with the decision, but have also noted that the future of the Post Office depended on its ability to offer new services, especially in the areas of savings and insurance.

Andy Fury, from the Communications Workers Union, has called the Post Office “a national treasure” and said that the government should be doing more to transfer it into the “people’s bank”.

Alan Duncan from the Conservative party, on the other hand, called the decision a “humiliating climb-down for the government, who have done everything they possibly can to find a way of awarding it (the contract) to somebody else”.

Opposing party, the Liberal Democrats, said that the decision must come as a big relief to postal workers, but added that ministers had “some explaining” to do in how the process was handled.

Spokeswoman for the party’s work and pensions department, Jenny Willott, said: “The government has wasted time and money and caused immeasurable heartache by dragging this process out for so long.
“This could all have been avoided if, as the Liberal Democrats have long argued, the Post Office Card Account has never been put out to tender in the first place.”

Business secretary, Lord Mendelson told peers that he believes “very strongly” that there was an opportunity for the Post Office’s future here that had been “enlarged by the turbulence elsewhere in the financial services sector.” He added that the government’s closure plan had not been painless but had “placed the entire network on a much firmer footing”.

It seems that each day we hear that the state will not be able to support us in our old age and it is time that we all started to look at personal pension, but when should you start looking? Is it ever to soon to look at taking out a private pension plan?

The truth is that if you can afford to take out a private pension then you should be looking to do so as soon as possible. True, there may be “better things” you could spend you money on when you are younger, but let us not forget that each pound that you put into a pension plan today will have grown substantially by the time you retire – assuming that the UK does not go bankrupt!

There are a number of factors to consider when looking at your own private pension plan which include :-

Tax Incentives

Any contributions which you make to a pension plan will be tax free – whether taken gross at source, or the tax is reclaimed at a later date – making it very cost effective.

Regular Payments

If you set up a regular direct debit to cover your monthly premiums it will not be long before you do not even realise that the money is coming from your account.

Age

The sooner that you can start saving for your older years the better because the money that you put into a pension plan will be invested across a broad range of assets. By using this broad range approach this secures your funds from over exposure in one area and allows you to benefit from the long term growth in the UK economy.

Family

Many pension plans today will allow you to ensure that your family are still catered for in the event of your death. While the state pension has no direct provision for passing over your pension entitlement on death, it is common place for private pension plans to make provisions for the holders family.

While there are many people who would argue that there is no need to start saving for your pension when you are young because of other costs you might incur, e.g. setting up a home, etc, the longer you can contribute to your pension plan the better.

It is easy to look at the state pension now and think that at least you will have an income in later life but the truth is that the state pension has been falling in real terms for many years and is set to fall further in the future. As the UK population continues to grow and people continue to live longer, the strain on the state benefits system is getting greater and at some point it will reach breaking point.

There is also the added problem of closer ties with the EU and the likelihood that all EU partners will need to share a collective pensions burden across Europe. While the UK benefit system may be creaking, countries such as Italy have gone far beyond breaking point and have serious funding issues.

You are never too young to start thinking about your future!

Pensions are always a very tricky subject for the masses with people not sure when to start, how much to put aside or even what they can expect to receive in retirement. These factors seem to combine and result in many people ignoring their pension planning until very much later in life when it can mean a substantial fall in their income upon retirement. So when should you start your pension plan?

In simple terms you should be thinking of your pension arrangements as soon as you start earning an income. While there are many who believe that a pension should only be considered when you have an established career and your income has grown substantially from the early days, this is not really the case. As more and more company pension schemes struggle to fulfil their obligations it has never been more essential to have your own personal pension arrangements, whether you go for a stocks and shares based long term pension plan, savings plan or some other type of pension, the whole risk / reward spectrum is available to you.

Let’s not forget that even if you are only able to put aside a relatively small amount in the early days, your net contributions will be increased by assistance from the tax authorities, and you may be investing that money for 40 years or more – depending upon when you actually retire. Many people also forget that any income which your pension arrangements produce will also be reinvested into your pension pot, so not only will you hopefully see your initial contributions grow in value over time, but any dividends or income from your pension investments should also grow over time. It is this point which may people seem unable to grasp, the re-investment of income – a very powerful and potentially lucrative element in the longer term.

In summary you are never too young to start a pension plan and even just a few pounds a month can make a massive difference in the long term, and it will also give you experience of saving money – something which could prove vital in later life!