I remember my grandparents enjoying a pretty comfortable retirement, on a State Pension with my granddad’s income topped up with a pension from his company. I have no idea what the State Pension was back then, but he received £2 per week from his ex-employer (yes, I’m that old), and it made a difference.
They were among the lucky ones, both living into their 80s and with their home paid for, at the tail end of an age where State Pensions were geared around folks not living too many years beyond the day they retired.
The problem was structural. National Insurance contributions were not directly put towards investment plans to provide returns for investors, but instead the idea was that each generation’s contributions went to pay directly for existing pensions.
But in an era of rising longevity and increasing aspirations, that was an approach that was doomed to eventual failure. In 2016, 18% of the UK’s population were aged over 65, and that proportion is growing — and there’s a limit to the burden a country can place on those still in work to pay for it all.
What should you do?
At the risk of sounding obvious, you should save and invest for your retirement yourself — and start as soon as you can.
I started my first job in 1980, and I moved on from it less than four years later. I’d been contributing to a company pension scheme during those years, and as the value of it was below a certain threshold, I had the option of transferring it to my new employer’s scheme or taking the cash.
Being young and feeling that retirement was so far away I really didn’t have to think about it, I took the windfall of about £1,000 and spent it on… I can’t remember what. That was a mistake!
If I’d transferred the cash, judging by the current performance of the new company’s pension (I left the firm a long ago, but I still have the pension in place), it would probably be worth at least £10,000 today bearing in mind the protected benefits of those schemes back them.
It’s never too late
OK, so it’s too late to turn back the clock and put right the mistakes of our youth. But it’s never too late to start. I recently suggested 5 things you can do to boost your pension today, and I’m not going to repeat all of that — but I will expand a little on my thoughts on taking control of existing pension schemes.
I briefly pointed out that “some old-style pensions which have protected benefits are still not completely free, but there can be circumstances in which you can get those transferred too,” and there have been developments on a pension I hold which falls under the protected-benefits rules.
Companies managing such schemes are often not too keen on having to maintain their liabilities, which can sometimes amount to significantly more than the contributions made by their members, even after accounting for a reasonable annual rate of return.
The managers of my scheme are obliged by pensions regulations to only agree to transfer my fund out to a SIPP on the receipt of appropriate professional financial advice. I know that because I’ve asked them how I can possibly get the money out.
Financial advice
And you know what? They’ve recently offered me financial advice from an independent advisor, at no cost to me. A cynic might suggest that pension managers are keen to get rid of as many long-term liabilities as they can. But at the same time, recognising the individual requirements and moral rights of pensioners to decide their own financial fate has to be a good thing.
As an aside, there’s no shortage of potential SIPP recipients keen to offer me financial advice too.
Having said that, for a lot of people, pension schemes with protected benefits can be a very good thing, and I would not urge people to abandon them in a cavalier fashion. No, your personal circumstances and personal investing strategy are paramount, and you must be confident you can do better yourself with the money.
Now here’s a suggestion that might be unpopular… why not just carry on working?
Why retire?
I know, many folks reaching retirement age are just looking forward to the day when they can quit the rat race and settle down to a life of relaxation, and they might suggest I keep my ideas to myself.
But with modern health advancements, people in their mid-60s and beyond often enjoy excellent physical health and fitness, so why not carry on in a productive role and keep on enjoying a significantly better income than if you stopped work? And the longer you can wait before you start drawing down cash from your pension plans, the higher your eventual income from those will be.
There’s another side too. I have several friends who have worked hard and have looked forward to retirement, but it’s not been until some time after they’ve hung up their work boots for the last time that they’ve come to realise that their whole lives had revolved around work and their workmates. They’re no longer part of their old social circles, and they spend their days moping around at home with nothing to do.
I’m fortunate in that what I do (I’m a freelance writer) is easily scaleable and that I enjoy doing it, and I plan to carry on with it as long as I’m having a good time. But even if I gave that up, I think I’d still want to do some sort of part-time work as long as I could.
Anyway, I hope these thoughts are of some use. But please remember, you really can make a serious difference to your own retirement — and the sooner you start planning it, the bigger the benefit.
