The Pensions Perfect Storm

My parents’ generation was, in a lot of ways, the lucky generation. Why? Because over the course of my parents’ working life both house prices and share prices rocketed.

The asset price boom which took place from the 1970s to the 2000s was the greatest there has ever been, and I suspect America and Europe will never see the like of it again.

How things have changed

During the late 1990s I worked at Unilever. Like many companies during that time, the final salary pension scheme had so much money that it actually suspended contributions into the pension fund. That meant that I was not paying into the fund at all, yet people who were retiring at the time had fabulous pensions.

The pension fund had grown rich on surging stock markets. I think people will look back on this time as the heyday of the West. Fast forward to today, and we can see how things have changed.

Stock markets around the world are moribund, laid low by a malaise after the Credit Crunch and the Eurozone crisis. This has meant that it has been a dreadful time for people with pensions.

Annuity rates have fallen and fallen, and most companies have now phased out final salary pension schemes completely. Instead, employees now have defined benefit schemes. These pay out less, and it is a lot more difficult to predict what your pension will be, come retirement.

If, like me, you have moved between several companies, then it gets even more difficult to piece together an estimate of how much you will earn when you retire. In many ways, it seems to be a pensions perfect storm.

Map out your own path

But, if you look at the bigger picture, things are not quite as bad as they first seem. Because, you see, not only are pensions changing, but the nature of wealth is changing. High house prices have meant that the home you live in is, for many people, their main source of wealth.

Many others have inherited money from their parents. And others are buying buy-to-let properties, often with their inheritances, to garner more funds.

In short, the “cookie cutter” view of the past, when everyone had a 9-to-5 job, paid into their pension, and then retired when they were 65, is out-dated. People are now living à la carte. There are far more ways of having a comfortable retirement than paying into a pension fund.

And this is where investing comes in. If you are beginning to plan for your retirement, I think that investing in shares should be central to your thinking. It certainly is to me.

I have a regular Monday to Friday job. During evenings and weekends I write for the Motley Fool. I have a house with an affordable mortgage. Yes, of course I have a pension, but I am planning to make investing my main source of retirement income. So I am investing my savings, and any inheritance I may receive, into shares, with a focus on a few select UK blue chips and small caps, and a large amount in Chinese and Indian investment funds.

These days, it is no longer about following the tried and trusted — the game has changed. It’s about thinking outside the box. Find a path of your own choosing, and stick to it.

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Prabhat Sakya has no position in any companies mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.