It’s been a constant feature of the various online financial press in recent months and even years – at least as long as I’ve had an elevated interest in this sort of thing – but given the pace of change in the financial services market and in particular, with regards to pensions, I am increasingly concerned about the looming generational pension crisis that many are going to be facing.
What do I mean by a “generational pension crisis”? Well, if you think that the majority of us – at least those outside gold-plated civil service and public sector pensions – are now no longer on final salary pension schemes and therefore have an increased responsibility to save for our own retirement, then the question has to be whether individuals have actually done the sums required to understand what their financial situation will be at retirement. My guess is many haven’t and a majority of recent generations are relying on guesswork and assumptions, rather than making responsible provisions for what is arguably one of the main stages of life and one that many won’t be able to enjoy as they expect to (or see their parents and grandparents enjoying now).
What is enough?
This is Money featured an article last week, with a headline of: “Young people expect to retire with £95,000 pension pot – but most haven’t started saving yet”. The article raises some very valid points and for me, I find it both personally disturbing and largely worrying when I think of the looming crisis or ticking pensions timebomb as others term it.
Even having the aspiration of building a pension pot worth £95,000 – although apparently better than many others will achieve – is still going to lead to some harsh wake-up calls come retirement. At current annuity rates, this might secure an annual income of around £5,000 for a 65 year old male. That’s just over £400 per month! I appreciate spending habits might be reduced as we enter old age, but if you want to enjoy your old age, you’re surely going to want to have more disposable income available. Even the new flat rate state pension – again, assuming it’s still here and available to you when you come to retire – will ‘only’ add a further £8,000 per year to your income. So, a total £13,000 annual income isn’t that bad – but it’s hardly going to fund the lifestyle we see our parents and grandparents enjoying now, with holidays, cruises, new cars, buy-to-lets and other luxuries they have in their golden years.
Everyone’s retirement aspirations are going to be different, based on lifestyle now and individual financial situations. Given this is one of the main stages in life and the decisions made now will not really affect you for many years – but when they do, you’ll potentially have 10, 20, 30+ years during which you’re going to have to live with those choices you made in your earlier years. So making the right choices now, maybe saving more, or at the very least looking more closely at what you’re saving, whether it’s in the right plan or investment vehicle and whether it’s sufficient to give you what you want in retirement – is an essential activity I’d recommend everyone undertake. The Money Advice Service offer a helpful Pension Calculator that it would be worth using to give you an initial insight.
The effect of compound interest shouldn’t be ignored either. I wrote about it an article a while back, quoting Einstein as saying he considered it the 8th wonder of the world. As a father, I’m making sure my son is going to start off in a better position than I did by making pension contributions for him from the day he was born. I would argue that all parents interested in the long term financial security of their own offspring should do this – and any amount, invested now, will be hugely important 70+ years hence when he comes to retire (as the state pension age – if there even is a state pension still – will surely be in excess of 70 years).
I’ve read with interest the changes George Osborne has brought in to the pensions sector in the UK and think the decisions have led to progressive change that have made the situation at retirement much fairer and more easily influenced by the powers of the open market. But again, I wonder whether many will be relying on assumptions too much here and in reading about the pension freedoms and the ability to access your money, such as using it in flexible drawdown (assuming your provider permits it), or not investing in annuity – most articles overlook the fact that the freedom to do something with your pension only truly becomes a worthwhile change, if there’s a sufficient pension pot available to do something with in the first place.
So, what’s the answer? Right now, I feel that everyone of working age needs to take a long hard look at their saving plans and really work out what they’re saving, what that could total at their future target retirement date and figure out whether that’s an acceptable level for them. I’m confident many won’t have done this, otherwise we wouldn’t be seeing articles like the one in This is Money.
I think we also should see an increase in saving more – and the auto-enrollment for pension saving (Nest) is a helpful starting point, but is it enough? Is the general population being lulled into a false sense of security and thinking that just because they have the Nest and the state pension in place, that they don’t need to think about this sort of thing? I’d argue yes. I’d also argue that Nest needs to ramp up its contribution percentages – from all three parties involved: employers, employees and the government. An extra 1% even, from each, could make a significant difference to the financial situations of many.
I also believe that child benefit should have a mandatory pension element for all children up to the age of 18. Even at at £25 per month, for 18 years at 5% compound growth (after charges), the pot would be £106,701.70. The government needs to do more in this instance, particularly if they don’t want the state pension to become increasingly unfeasible, or a bigger burden on the UK economy.
Overall, the message is simple. Don’t rely on assumptions. Do your sums. Plan ahead. And save more!
As always, these are just my personal opinions and should only be used as guidance. Where financial situations are concerned, please do your own research and in many instances taking professional advice is definitely advised.