FOOL'S EYE VIEW
Your Retirement Is Your Problem

By Jane Mack (TMFJane)
October 12, 2004

Okay, folks. Here's a simple question. What's the solution to the impending pensions meltdown, as outlined in the newly published 346-page Pensions Commission's interim report on the state of the nation's retirement plans? 

Would you prefer to be forced to:

1. Save more;
2. Work longer;
3. Pay more tax, in order to boost the State Pension;
4. A combination of all of the above; or
5. None of the above (in which case, feel free to come up with a magical solution yourself on our Pensions discussion board).

The Pensions Commission was set up two years ago to review the UK's private pension and long-term savings regime. And, guess what, the news is not good. In fact, it's even worse than expected. Instead of the oft-quoted £27 billion savings gap between what we're saving and what we should be saving each year to ensure comfortable retirement, it appears this shortfall is nearer £57 billion!

According to the report, in 2002/03, 11.3 million people in work were not making contributions to any private pension scheme at all, and 8.8 million of these did not have a partner contributing to a scheme. Unless these people have somehow accrued pension rights from previous employment, they're relying entirely on the state system to support them in their old age. And these figures don't include those who are saving, but aren't saving quite enough.

Unfortunately, there won't be enough people around to finance those who will be forced to depend on the state during retirement. By 2050, there will be 48 pensioners for every 100 people aged 20 to 64 (i.e., potential working taxpayers). Currently, the ratio is 27 to 100.

We can carry on muddling through, says the report, but it would be unfair and less economically efficient than what could be achieved if we thought through a planned and comprehensive long-term policy now.

The reasons why things cannot go on as they are, the report warns, is that most people do not make rational decisions about pension saving; the cost of advice significantly reduces the return on saving; the UK pensions system is extremely complex – leading to confusion and mistrust; and means-testing increases complexity and reduces the incentives to save.

And the report cautions that, although home ownership could provide important retirement resources for many people, it's not a solution in itself, not least because most people won't own homes valuable enough to trade down to release enough equity to live on.

A particularly alarming point that comes to light in the report is the inadequacy of some of the data supplied by the Government to the Pensions Commission. In other words, comprehensive though this report is, some of it is based on data that the Commission considers a bit duff.  For example, the way that governments have been underestimating average life expectancy rates! It has, therefore, made a number of immediate recommendations about how the Government collects and analyses statistical information.

To my mind, at any rate, you have two options:

You could wait another year for the Commission's recommendations about what should actually be done with the current regime.  These are due to be published in Autumn 2005, after a period of consultation. You can then wait a few more years for the recommendations to be discussed endlessly in Parliament and then implemented. (Or not, as the case may be, depending on which government is in power at the time and whether the recommendations suit its policy).

Or you can start saving for yourself, right now, on the basis that the only person you can trust to ensure your financial security is you. If you have no savings at all, as a ballpark figure, take your current age, divide by two and save that number as a percentage of your take-home pay for the rest of your working life. That way, you just might be able to live above the poverty line in your retirement!

Successive governments have tinkered with pension provision for far too long now. Who's to say that things will improve any time soon, or ready for the day when you come to retire? If you're under fifty and not saving, you are facing a very grim retirement indeed. Without a shadow of a doubt, the biggest part of your financial future lies in your own hands.

I know which option I'm going for!

More: Learn to invest in Pensions and ISAs.