The subject of pensions is getting a flurry of attention in the press, with politicians vying for position on who has the best strategy for dealing what is increasingly looking like a nightmare waiting to happen. The inadequacies of the UK State pension, funded by our NI contributions, leave the UK’s pensioners amongst the poorest in Europe (including some eastern EU states). However, we now face further changes that are likely to exacerbate the situation. We have Personal Accounts and the auto-enrolment on the horizon from 2012 – albeit that even this implementation is being delayed/phased in. We have the prospect that state retirement dates will be pushed back progressively from 2016. We are still suffering the damage to pensions funds brought about by the Government decision to stop tax relief on dividends in 1997 that cost approx £5 billion per year. Indeed, for many people in defined contributions schemes, their pension funds are little more than they have paid in. All of which adds up to the reality that we have insufficient people saving insufficient money to provide them with a decent income in retirement.
However, simply complaining about it will not fix the problem. We are living longer and so sooner or later someone was going to have to ‘bite the bullet’ over retirement ages. The ‘financial crisis’ is not the root cause, but it has certainly brought the situation to a head and perhaps perversely, it may actually have resulted in people now being more willing to accept the inevitability of change than they may otherwise have done without the crash.
How have other countries dealt with the prospect of a growing aged population? Well, many will be familiar with the comparatively generous German and French benefits systems. However, there are interesting lessons that we missed from Australia and the US who have has their ‘Superannuation’ and ‘401(k)’ schemes running for many years. The Superannuation scheme in Australia that requires a minimum of 9% pa has resulted in over 95% of Australians saving for retirement compared with less than 50% in the UK. This is compounded when looking at part-time workers with three-quarters saving in Australia compared to only 15% in the UK. Whilst we may be learning – belatedly – from what others have been doing, not only have we not yet dealt with it, but there is a growing feeling that PAs could create false expectations that they are a comprehensive solution to the problem, whereas for many it is a case of too little too late.
We have talked in the past about the damaging effect of ‘misselling’ scandals on public confidence in the Financial Services Industry. Low levels of confidence and a continuing lack of financial awareness amongst the general population, combined with a general apathy, have caused people to put off financial planning decisions that has resulted in them either delaying or failing to make pension arrangements.
Years ago, an adviser asked me if I would leave my car parked on a meter if it cost me £4 per minute to do so. As a Yorkshireman, I inevitably said that I wouldn’t… he went on to explain that by delaying setting up a pension could cost this amount in lost benefits. We can argue about the maths of illustration assumptions and the comparative cost of parking these days – the conversation was in the mid 1980s – but the analogy is still quite effective.
For some, they simply cannot afford to save the amounts now needed and there is not enough time to fix the looming ‘car crash’ that will be their retirement. Let us hope that Generation Y will learn the harsh lessons from Generation X. Competent Financial Planning and advice is as important to ones quality of life as is decent healthcare and education.
