Personal Finance Planning: The Importance Of Incentives For Retirement Savings

Article on Personal Finance Planning

The Importance of Personal Finance Planning

Discuss about a Article on Personal Finance Planning?

Personal Finance Planning refers to the management of financial benefits. It helps an individual to understand the calculations and predictions of each and every financial decision. (Chlebikova, Misankova and Kramarova, 2015).  As every individual possesses a different goal, so it is extremely needful to propose a different and unique plan that can excel the procedures of financial management for both the present times and for the future references. The UK is the centre point of having a relatively higher range of per capita retirement financial savings. It has been reported that the rate is even higher than Europe as well. In the context of a low and crumbling state of the current standards of the state condition of pension in the UK, developing a strong personal pension savings plan accumulates extreme importance. In this present article, we would critically consider a statement made by the UK Pensions Minister, Baroness Altmann. She stated in relations to the personal finance planning that to invest for a long time period it is highly required to incentivize every individual person, but to achieve that goal the Government is required to ensure offering the right incentives at the perfectly right time. This present article would critically consider Baroness Altmann’s statements as well as would discuss whether or not the successive UK governments have created an environment to encourage consumers to grasp the importance of the planning of retirement.

Due to the lack of excel to a set of honest information and advisory, UK government failed pathetically to protect the pension rights of the members of the final scheme of salary. At the same time, the incentive problems were high because of the complicated state provision issues. So what Baroness Altmann has stated was highly required but in the UK, it was not being followed properly. Presently there is running a trend which speaks for the increasing needs of individual provision. If people do not save or invest, the savings level falls down increasing the state support and risk of causing the pensioner poverty. In recent times, the problems and difficulties related to saving are much higher than that of not saving. The current economic system prevailing in the economic system of UK promotes disincentives. UK’s structure of incentives to plan the financial savings and use tax systems as the key strategy of incentive saving have been neglected the most in recent years. In the present scenario of gradual revert, this negligence and inattentiveness are absolutely surprising. Those who usually try to save belong to that area of society who earns a significantly high amount of money and as because they earn a high amount of money they tend to receive highest marginal tax receive facilities. Therefore, they get ample opportunities of saving a high percentage of saving. But according to the words of Baroness Altman herself, the finance planning of incentivizing every single individual should not be limited to a few privileged class, but the government itself should take measures to spread the awareness to combat the situation of financial crisis via incentivize. (Hilsdon, 2012) To spread the awareness about the benefits of savings and owning asset materials to every member of the society the Treasury actually argues on encouraging every single person to develop a regular nature of saving so that they can recognize the benefits of saving. To support the Pension minister herself, it can be said that the benefits of saving and incentivising are of immense significance. There are some practical and behavioural benefits of having a properly chalked out financial plan of saving. (Danro, 2011)

	Behavioural Benefits	Practical Benefits Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Individual Benefit	·         Self-reliance and security of independence enhance. ·         Improved betterment of personal development skills. ·         Enhanced ability to shape a plan. ·         Improved condition to bear and afford luxuries. (King and Carey, n.d.).	·         Proper precautions designed savings plan would help to mitigate the risks of times in adversity, i.e., emergency situation, periods of unemployment and during retirement. ·         It would increase the level of comfort during old age. ·         Improved real life situations such as high rate of earning and less unemployment.
Social Benefit	·         The increased stock of national resources. ·         The residents of any country become exclusively attentive towards a better future which promotes financial efficiency. ·         The economic growth of a country equally motivates its people. (Lymer and Richards,  1995).	·         The cost of prosperity and social security support reduces. ·         The increased capital stock of finance. ·         Long-term growth of the general economy. ·         Enough domestic support in the capital markets.

The Current State of Retirement Savings in the UK

Table: – Individual and Social Saving Assistance

UK Government, nevertheless presently published a set of crucial policies explaining why they encourage and introduce savings since 1997. (Collins and Wiseman, 2012).  These go as follow:

Capital pension limits are increasing.

CAT standards have been introduced.

Government needs to fight financial barring and exclusion by providing basic bank accounts to every single citizen

.Government has also authenticated Financial Services Authority as the only regulator of finance management.

Financial education has been decided to be included in the part of the national

Stakeholder pensions and Pension credits have been inaugurated. (Mole, 2002)

Financial incentive refers to a set of monetary benefits designed to promote and motivate encourage in behaviour and actions which on the other hand might not happen without the monetary benefit. Money, in this case, plays an important role of motivator. (Waring, 2011). The common uses of money as incentives are acted out in many forms, i.e., wages, the increment of salary, beneficiaries at the period of retirement, medical compensations etc.  To encourage people to save the UK Government currently launched curriculum of major financial incentives and that has been termed as the tax relief. There are procedures which explain as to what are supposed to be the usage of those generous tax breaks provided by the Government of UK. Tax relief can be used for the benefits of the pensioners and those short term saving equipment, i.e., ISAs which would help the people from the low-income group. (Oakshott, 2012).

The current structure of the economy in the UK has inequity in its structure of incentives and tax relief. 90% of the UK population of taxpayers do not have proper knowledge of tax relief and therefore, they are unable to make out the exact amount of money government is allocating them as tax relief to include it into their pension account. Tax relief is considered to be an attribute of negativity and inflexibility by some people. (Staehr, 2015) The reason behind the inflexibility stemmed from the realization that higher income group of pensioners are much more benefited with more government money than the basic rate taxpayers. The second table below would expand more on this, showing the polarity of higher and standard tax relief which provokes wealth inequality. The effects of time compounding impact on the tax relief, the cost of every individual remains the same (£12/ month for 30 years as it mentioned in the provided case study). In this scenario those who pay a higher rate of taxes will be benefited with high rates of pension pots than those who stand below them. They would be accumulating over £16,000 compared to those who belong to basic rate just above £12,000. (Times Finance London, 2016)

	22 percent tax payer (Assumption : 20% simplicity)	40% tax payer
Pre-tax gross individual contribution	£15	£20
Post-tax Net individual contribution	£12 net/ month for 30 years	£12 net/ month for 30 years
Per month contribution of state fund of tax relief	£3 per month by UK Government	Government effectively puts in £8/month(£4 – pension £ 4- tax bill off )
Total state contribution over 30 years	£1,080	£2,880
Pension pot after 30 years	£12,280	£16,373

(Times Finance London, 2016). .

Table 2: The present structure of tax relief shows wealth inequality

To wrap up the article, we may conclude that it is high time for UK government to design a reformed plan of saving, regardless of the different income standards. The aim to be adopted by the government in this context is to arrange for pensions savings incentives for as many people as possible. (Brealey and Kwan, 1999)The inequality in the gross incentive plans should be mitigated to provide a better life for everyone. The process of incentivising should be operated through a procedure called “minimum lifetime annuity” where policies should be designed on the basis of pension savings. In order to look after the costs that the new scheme possesses, the UK government would require setting few limits on the amount of savings which would, later on, be awarded matching payment incentives by the Exchequer. (Bonoli, 2000). The level or the base on which the limits are to be set is of high significance. The limits can vary on the basis of the ratio of incentives to the number of resources. The UK government is also supposed to encourage the citizens for savings throughout their life cycles. The reasons for this encouraging lie in the factors, such as, it would invariably simplify the savings environment and secondly, it would educate people on starting a routine of developing their own savings plan early. Early savings plan would, therefore, secure the future desires of people by backing them up with a stock of emergency assets. The government is also supposed to launch proper awareness campaigning to educate people on personal finance planning. (Atamian and Kinevan, 1981)

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