FOOL'S EYE VIEW
You Can't Count On The State Pension

By David Kuo (TMFDragon)
February 28, 2002

Carburton Street, London -- Today's survey on pensions by MORI, which was conducted for Age Concern, makes for grim reading. It claims that seven out of ten people have little or no confidence about their income in retirement. Nor have they given any thought to saving for their old age. More worryingly 43% of those aged 25 to 34 said they either could not afford to save or had not considered putting money aside for their pensions. Sadly, it would also appear that many people still believe that their state pension will be adequate to cover their income needs in retirement.

There are several issues that need to be tackled here. The first relates to the lack of confidence that the majority of people have concerning their income in retirement. This could in part be attributed to the misunderstanding of annuities. As the law stands at present everyone with a personal pension will need to buy an annuity with the bulk of the money they've saved in their pension funds. This annuity guarantees pensioners a regular income for the rest of their lives. But, with lower long-term interest rates and people generally living longer, the annual income that annuities can produce has declined in recent years. What was once considered to be an ample pot that could provide a steady stream of income now appears inadequate.

But low inflation also suggests that the income required to cover basic living costs should also be less. That means less money is required to buy the annuity unless inflation rises. But perhaps more significantly we have a misconception over the apparent unfairness that surrounds annuities. This is because the annuity that we buy cannot be handed down to our dependents. Instead, it's a form of insurance contract that you buy with a lump sum and which pays an income for life. So people worry that they'll lose out if they die early, without thinking that they'll be quids in if they live longer than expected.

The MORI survey also found that 43% of those aged 25 to 34 could not afford to save for their old age. It is undeniable that some people will find that the income from their principal source of employment will be inadequate. But to put that figure at 4 in 10 people seems a tad unrealistic. A more likely explanation could be the unwillingness of those people surveyed to save for their old age, but this has more to do with allocating scare resources than affordability. Careful budgeting should allow almost any wage earner to put aside 15% of their income towards some sort of savings plans in preparation for retirement.

More telling perhaps is the lack of consideration that young people give to retirement. It is of course difficult for a 25 year old to conceptualize an event that is unlikely to happen for another 40 years. This is hardly surprising since there are far more interesting things to do when you're young than to think about sending off for that Saga holiday brochure. An earlier survey conducted by MORI found that a third of respondents felt they had no need to worry about their retirement provision because there was always the State pension to fall back on.

Those people need to think again, or they'll be sorely disappointed. The country just can't afford it. Perhaps this explains the most distressing finding from the survey: that so many people still believe that the state pension will be adequate for their retirement. In this respect the government has not done nearly enough to tackle the pension issue.

We should also remember that pensions are not the only vehicle for saving for our old age. ISAs have their place and some people put their faith in bricks and mortar. One thing is for sure, though, people need to save more and they need to start sooner rather than later. As important as providing incentives for people to save, the Government needs to find ways of educating people about the need to do so.

More: Pensions Centre and ISA Centre.