The naked pensioner

Individuals still want what their parents and grandparents had ….the reality is that very few can and even less will achieve that…..

There is a strong argument that politicians are out of touch with the people they are trying to represent. Most politicians have money, and few have experienced the realities of day to day life and the challenges less fortunate individuals face.

As an industry we are just as guilty as the politicians. We hear well respected analysts bemoan the pension situation in this country and this has ramped up since the radical overhaul announced in the recent budget. My belief is that these individuals, although well meaning, are missing the point.

Car crash

It is much the widely held view that a state retirement age of 65 is unaffordable and unrealistic. The argument is very simple: it was set at a time when most people died at 65 and therefore the cost was minimal. Now most people can expect to live 20 plus years in retirement and the figures don’t add up.

For politicians to tackle this would have been political suicide unless a catastrophic event occurred which forced their hand – 2008 was that event. However, moving the state retirement age to 67 or 68 isn’t enough, it probably needs to move to at least 75 or 80 (but this is a slow moving change with time to implement).

Of course the politician who recommends those changes will need pants of steel (because let’s face it most politicians are still men!)

The state pension age was a car crash waiting to happen, that crash is happening now……and will continue.

Thirty years

If we tell our children how we plugged a cassette player into our computer and wrote ten lines of programming to get a game they would think us mad. Technology has advanced at such a rapid pace over the last thirty years and even more so in the last ten years. Everything has changed and we tend to focus on that as the only change.

But there is a lot more that we have missed, and done nothing to tackle.

Talking to people in the mid-1980s and they would have said they wanted to retire at 55, 65 at the very latest. Ask now and the answer wouldn’t be dissimilar. Individuals still want what their parents and grandparents had ….the reality is that very few can and even less will achieve that…..

What’s changed?

Fundamentally because we are living longer, everything has changed.

Most people blame Gordon Brown’s raid on pension funds as the death knell for final salary schemes. It can’t be denied that this helped in their decline, but it wasn’t the only reason.

The reality is that like providing for the state pension scheme, people are living longer and the only way to fund this is to pay more money into the schemes. Most companies tried for a while but it was inevitable that many closed the schemes, so they ‘only’ had to fund existing members whether in receipt of a pension or due to receive a pension in the future. Still a large expense but it will decline over time.

Only twenty years ago individuals working for a company with a final salary scheme could expect a pension of say 50% of their earnings at 65 (assuming they had completed enough service) plus the state pension. No doubt there would be cash in the building society paying 6% a year and actually with the mortgage paid off and the kids making their own way in life everything was rosy.

Now there are no guarantees. We have to rely on what we save from now to retirement.

Challenges to saving

Politicians and industry commentators claim that people need to save more and this is great but even they have forgotten the basics of financial education, and in reality many don’t have the same concerns that the average person has.

If we go back 25 years to the early nineties we were told that home ownership was the ultimate goal. For the sum of £40,000 you could purchase a house.  Someone earning £15,000 a year with a small deposit could afford a house. This meant people just starting out in their working career could buy a house.

As they earned more they would have spare capital which in theory they could save for retirement.

Skip forward to today we have the same aspirations but the average house is now £200,000. Starting salaries are not that different so someone earning £15,000 a year will never be able to get on the property ladder however they will try and save in the hope that their salary will increase. Therein lies the problem, whilst they are saving for their house they are not saving for their pension.

And it is not just the cost of houses….petrol 25 years ago was around £1.50 a gallon, now it is over £5, gas and electricity is nearly as much as the mortgages 25 years ago and it goes on. Salaries haven’t substantially increased but everything else has.

These are the challenges which we as a society face today, so what do we do…….?

Radical changes to pensions

Of course you have to applaud the government because they have changed the way we interact with pensions. There are those that claim that industry figures are patronising by saying individuals can’t be trusted to manage their own pension but there is truth in this.

The government move could be considered a gimmick or a potential vote winning tactic.

Someone with £100,000 in a pension would be mad to cash it in and take the money unless there were specific reasons – tax would decimate the fund and no investment would replace that without considerable risk (and no guarantee).

The only winner will be the government with higher tax revenues. Individuals need to understand this.

So what can be done……

Therein lies the million dollar question and this is what everyone should be focusing on. Work is being done, education in schools is now starting, auto enrolment has come in but this is all fluff around the edges and doesn’t tackle the real difficult questions.

So where do we start

Perhaps everything has to change…..

Perhaps moving the state retirement age to 75…….

Also accepting that most people start buying their first house in their thirties (maybe forties) and that most people won’t start saving for retirement until they are in their early forties.

More radically perhaps we need to scrap pensions and focus on NISAs.

The point is that rather than looking at what we have and focusing on that, we need to start from scratch and consider the future. Only then can we develop something which reflects the future, but whatever is developed it needs to be adaptable because in twenty years a retirement age of 75 maybe unrealistic and it should be 80 or 85.

Things change, and they change quickly. To ignore things as we have done is disastrous, the question to the well-meaning industry experts and politicians is – are you going to do something radical or just tinker around the edges?

If you are going to tinker around the edges then you will be left with lots of naked pensioners unable to afford to ever retire!!!!

 

 

NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past Performance is not a guide to future performance and investments can fall as well as rise.

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6 thoughts on “The naked pensioner

  • There are significant threats to achieving the savings level required to prevent naked pensioners running riot over the next few decades. One of these is a shift towards shorter term thinking by a demographic that embraces change more easily and is used to a consumer lifestyle that encourages fast track obselence and an ‘everything is replaceable’ approach. That isn’t compatible with longer term savings needs, for which the only solution may well be compulsion. That in itself risks further alienating savers who have lost trust in financial institutions.

    Picking up on an earlier point though, Government made an important step by increasing the State Pension age. That first move (ignoring, for a moment, the alignment of female State Pensino ages) is the most important one as it sets a precedent, and gives momentum to make further increases. Increasing the State Pension age by a two years every parliamentary term could see the change we need delivered within a generation. It is doable, and drip-fed change is more palatable to even the least resilient.

    I believe we’re at the point where we will see a seismic shift in savers perceptions. One the one side we have those aged 50+ – a generation who saved (or who have benefited from enhanced employer saving) and who were told that they could never access their pension savings. They’re the generation who are most likely to react by withdrawing more of their pension as capital, and they’re the most likely to be able to afford to.

    Unfortunately, they’ve also been set unrealistic aspirations by their parents, difficult to achieve in today’s inflated housing market. They might have expected to receive a financial boost from inheritances but, with their parents taking more out of their pensions and increasingly releasing equity in their homes to find retirement, they may receive less then they think.

    Good article.

    Then we have a younger generation who are now going to start saving with the confidence that they will be able to access their pensions at retirement in ways that were not possible before. Engagement with this generation can drive up saving levels, but this generation also have a more cynical view of financial institutions and are less willing to trust their money to them.

    Reply
  • That last paragraph should have appeared further up – oops!

    Reply
    • It is such a difficult situation – I have a couple more blogs to post which follow on from this. They pick up on some of your points (I think) especially around a generation who want everything now. I was asked if I could suggest solutions but I think that is very hard to do. Perhaps a change of mindset!

      Thanks for the comment much appreciated.

      Reply
  • It is such a difficult situation – I have a couple more blogs to post which follow on from this. They pick up on some of your points (I think) especially around a generation who want everything now. I was asked if I could suggest solutions but I think that is very hard to do. Perhaps a change of mindset!

    Thanks for the comment much appreciated.

    Reply
  • I suspect that we are fiddling while Rome burns !

    Technology has not only changed our lives but also those of the rest of the World.

    Our personal economic aspirations have been impacted by fierce competition from lower cost producers which has kept and will go on keeping wage inflation under control.

    The work done by the many in our society has largely been commoditised by technology and the genie is not going back in the bottle.

    Pensions and housing or the cost of living for much longer are not going to be solved by tinkering as we are now seeing and it is going to take an unimaginable change in mindset for all of us to adapt to the world we now face.

    Reply
    • I read something about the impact of change where the job you have today will not be the same in ten years time. In the past you could take on a job and have that for live. The pace of change, changes all of that.

      The reality is that you can’t pay more for a job just to keep pace with rising house prices however the break in that relationship where house prices (and rent) no longer reflect wages creates a real challenge to society.

      How we tackle that is the challenge, and that is not easy. Have a couple more blogs to add which continue the debate on this theme.

      Reply

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