Making financial decisions is never easy. There is always a lot of thinking to do, whether the decision is which fund to buy, which pension vehicle to choose in planning for retirement or whether to invest those extra savings in the stockmarket or property.
But the big decision that working-class Britain will be forced into thinking about before long is whether or not to save for retirement. It seems like a simple enough decision but the recently introduced pension credit has, believe it or not, made it a very difficult decision indeed.
Around 5.3 million pensioners have recently been given the go-ahead to claim the pension credit, which is replacing the minimum income guarantee.
It is widely recognised that change was long overdue but what has been forgotten is the reward for lifelong saving.
The introduction of the pension credit has thrown many into a spin because people who have saved all their lives may be unfairly disadvantaged in retirement.
The reason that lower to middle-income earners will be mightily confused is because the pension credit seems to contradict the work done by the Government in recent years in creating a savings culture.
The credit promises to provide an income of at least £102.10 a week for pensioners who live alone or £155.80 for couples. However, those who have taken up the savings message and made moves to build up their own pension pot throughout life are set to be penalised.
The pension credit is sending out the wrong signals to a large part of the population – do not worry about saving, the Government will look after you.
With the UK pension system in disarray and a national savings gap of around £27bn, there is no doubt that the system was in need of a facelift.
The Government's stakeholder scheme, announced in 1998 and introduced three years later, went part of the way in addressing the need for people to save as it provided a low-cost route for saving.
Stakeholder pensions were presented as a crucial component in the Government's long-term plan to provide access to a good value pension. It has had its fair share of criticism, particularly in terms of take-up figures, but there have been success stories.
However, the very possible reality is that what savings culture that stakeholder has managed to create could be destroyed. If those who have never put a penny aside for their retirement are taken care of by the Government, there will be little incentive to save for those still working. Employees who have embarked on a long-term savings plan through stakeholder could just give up saving altogether.
It is estimated that for an individual to be clear of any penalty under the pension credit threshold, they must have accrued a pension fund of between £60,000 and £90,000. For most people on lower to middle incomes this is just not a reality.
As the pension credit guarantees a minimum income amount if the individual has no other savings or income, a large number of employees may feel that this is the better option than to spend years saving just to receive a credit of 60p for every £1.
Government moves to reform the pension system are certainly welcome but the changes that have been put forward seem to make little sense when considering the savings culture that the Government has been encouraging over the last few years.
The ABI has recently proposed that the state pension system could be made simpler and stronger by introducing a flat-rate and more generous second state pension. This would raise the state provision above the current minimum income guarantee, making means-testing pension credit redundant and removing a layer of great complexity.
But many agree that the road to reform through the pension credit will not be the most effective in the long-term in that it may fail to encourage a long-term savings culture. The introduction of reforms to the pension credit fails to reward or acknowledge those who have spent the last few decades adding to their own personal pension pots and planning for their future, the very things that should be encouraged.
The pension credit is forcing lower to middle-income-earners to decide whether saving for retirement is worthwhile. Who could blame them when those who have not saved throughout life are provided for by the Government?
Surely it is high time that the Government stopped sending out mixed messages and concentrated on encouraging people to save for their retirement.
Initiatives such as the pension credit do little to instil a savings culture in the UK and ignore the inroads that have been made through low-cost veh-icles such as stakeholder.