Discuss_How_Different_Households_Can_Plan_for_the_Future_Characterised_by_High_Unemployment_and_Low_Provision_of_State_Pensions

Discuss how different households can plan for the future characterised by high unemployment and low provision of state pensions According to the extract the future appears bleak for those hoping to retire comfortably with predictions of high unemployment, low government provisions and little expectation that many will actively plan and prepare for their future finances. This essay aims to look at the different households and the differing responses they can take in preparation of their future finances. Vivienne Brown (2006) provides a useful definition of a household as “ A person living alone or a group of people who have the address as their only or main residence and who share one meal a day or share the living accommodation” VB 2006 Pg.22 Chapter 1 Personal Finance: setting the context There are different types of household and with changes over the life-course a household can take on various sizes and compositions. Table 1.1 Types of households in Great Britain1, 2010 [pic] Type of household As a percentage of all households [pic] One-person households 29 One-family households 67 Couple (no children) 28 Couple (with children) 21 Lone parent 7 Two or more unrelated adults 3 Multi-family households 1 All households (24.2 million) 100 [pic] Source data from ONS Social Trends edition No 41 Households and families Jen Beaumont 2010 Table 1.1 shows data collected from the different types of households categorised in Great Britain. This table provides an idea of the variety of different household compositions in Great Britain. These categories can be broken down even further by age, income, and ethnicity for example low income households will differ from higher income households. Older households with pensioner couples or single male or female pensioner households without children will differ from younger households with couples and single adults without children. Households may also differ according to ethnicity and religious customs which have further implications on the household’s approach towards financial planning. Depending on the type of household there will be wider social and economic influences that may determine the list choices a household might decide upon for financial planning. To the question of how to financially plan for conditions of high unemployment and low provision of state pensions a variety of households will offer variety of responses, However this essays restrictive word count precludes a detailed discussion and so will only focus on a few of the types of households touched upon. An article published last year by guardian looked at some of the major changes in government policy on state pensions. Based on a report by the pensions commission the article predicts that many will need to work longer to pay for future pensions and that “From 2024 to 2046 the state pension age will rise gradually for everyone – both men and women – from 65 to 68” The state pensions revolution The Guardian available at http://www.guardian.co.uk/money/2010/mar/27/state-pensions-changes'INTCMP=SRCH (Accessed 14 April 2011) Already certain households will undoubtedly have to pay a price for these proposed changes as some groups have a shorter life expectancy than the average for the whole population. Even allowing for some increase in their life expectancy, raising the normal retirement age may mean that they never reach retirement or that they have only a few years in retirement. According to a House of Lords paper entitled ‘Aspects of the Economics of an Ageing Population’, social and economic pressures on income and lifestyle could severely impact those living in poverty and manual workers (who on average die three years younger than non-manual workers), Second, given that older people suffer from poorer health than younger citizens, any increase in the state pension age implies that many retired people would enjoy fewer retirement years in good health There are further considerations for those that are unemployed. A newspaper article reported on Government plans to introduce a universal state pension system dubbed “A state pension for the 21st century” to replace the current otherwise complex state pension system. This will introduce a one tier system that will pay a flat rate in the hope that pensions will become easier to understand and encourage private savings. The crux of this pension is based on worked earnings and so depends on how long you have worked and the number of National Insurance qualifying years you have you would need to have 30 qualifying years for a full basic state pension. New state pension: winners and losers The Telegraph available athttp://www.telegraph.co.uk/finance/personalfinance/pensions/8428171/New-state-pension-winners-and-losers.html (Accessed 14 April 2011) There has been a shift, in devolving risk, from the state to the individual. Households where possible need to respond, for any individual or household there will be financial implications in trying meet their goals and so a useful frame for financial planning is set out below. [pic] Stages of financial planning figure from Personal Finance. Assessing involves identifying the current income and expenditure to establish their are current financially capability to meeting their goals. Deciding is considering possible actions, in this case setting a budget for future savings. Acting is the actual implementation of the plan, It is always important to review the plan particularly reviewing the budget and taking account of recent changes or events that might alter its success. A young couple with dependent children intending to get a realistic idea of their situation could try drawing up a cash flow statement as a good starting point. Using this statement the young couple could record the inflows and outflows of household income to help provide an idea of where any necessary changes might be made. After a thorough assessment of the detailed income expenditure a realistic budgeting plan could be put in place as a guide towards meeting their future financial goals. For most people budgeting in a consumer society can be a challenging and at times an impossible process as there is a considerable amount of pressure to spend on a variety of goods and services, so for many households there will be tensions between achieving some of their goals plus meeting their daily financial commitments. The ability to form a budget in such times to reconcile the competing demands on income as well as meeting the needs to save and invest for a future based on low state visions is vital. A household with dependent children will have added considerations as child rearing costs will directly impact both the income and expenditure aspects of the budget. With reference to the McClements equivalence scale depending on the households size and composition their budgeting plan will need to accommodate for this as a couple with dependent children will struggle on a budget to match the same standards of living as a couple on a budget without dependent children. That said even with careful money management there are still life events that can affect individuals and households financial plans. If the household breadwinner suffers a loss of earnings managing child caring costs on a tight budget, would force household’s expenditure to far exceed income. Relying on the very low provisions state benefits would cause households income to drop far beyond the feasible ability to adjust expenditure. The household would then have to dip into any existing savings. The savings and investments that any household has forms their assets, based on a financial balance sheet the net wealth of a household is the value of all assets minus all liabilities. Just as there is a interrelationship between income and assets there also exists an interrelationship between liabilities and expenditure. This has its own risks as if there aren’t able savings to draw upon the household’s liabilities with rapidly increase by them having to take out debt leading to indebtedness. For older households if as a result of a particular life event the ability to work and earn income is impaired or lost. There will be long term risks to the individual’s financial and mental wellbeing. Life events such as job loss can be with changes over the life course as well as the social and economic context. Research has shown people who lose their jobs in their fifties are far less likely to find a new job than any other age group. A report also found that there 400,000 over 50s unemployed in the UK - with 43 per cent classed as 'long term unemployed' Mature Times available at http://www.maturetimes.co.uk/node/12467 (Accessed 14 April 2011) Again with risk being devolved more to the individuals and state benefits insufficient to sustain an existing standard of living careful reviews of plans need to be made in provision of financial affairs. In order to remain financially capable an important aspect of financial planning is to consider possible sources of income at different stages of life the course as well as different life changing events as income profiles will be defined by these. Setting aside any earnings to pay for insurance premiums might offer the individual or household some form of payment protection to cover any regular monthly costs. However these arrangements tend to run for a limited period only so in terms of making financial provisions for retirement age another consistent source of income is required. Some groups may be more risk averse and Mona Patel from the Investment Management Association advises that ”It’s important that you don’t keep all your eggs in one basket, so you must make sure that you do keep a good mix of assets,” Mona Patel Personal Finance DVD Rom Chapter 5 For any household with a view to achieving a comfortable retirement making provisions for uncertainties arising from external aspects within the wider social economic context, as well as personal changes in circumstances is vitally important. Diversification helps reduce such risks of uncertainty and allocating money to a range of different assets instead of just one can be described as ‘not putting all your eggs in one basket’ There will be financial constraints as imposing restrictions on the choices available however financial capability implies that individual can manage their finance in order to influence outcomes and events in a beneficial way. Word count 1553 Bibliography Personal Finance George Callaghan Ian Fribbance and Martin Higginson The Open University Walton Hall Milton Keynes MK7 6AA {Personal Finance DVD ROM} {(House of Lords, 2004a, paragraph 4.18). ‘Aspects of the Economics of an Ageing Population’} (ONS Social Trends edition No 41 Households and families Jen Beaumont 2010) {Mature Times available at http://www.maturetimes.co.uk/node/12467} {New state pension: winners and losers - http://www.telegraph.co.uk/finance/personalfinance/pensions/8428171/New-state-pension-winners-and-losers.html} {The state pensions revolution The Guardian available at http://www.guardian.co.uk/money/2010/mar/27/state-pensions-changes'INTCMP=SRCH} [pic][pic][pic][pic]