Retirement, and particularly pensions, have been in the news a lot in recent times. As someone who can see 60 looming it is a topic of growing personal interest.
The plain truth of the matter is we have a huge crisis looming and somebody, sometime soon, is going have to do something about it.
Quite how big that crisis is was really brought home to me at a recent wealth management event. And it made for uncomfortable listening.
When I left school in 1980 and started paying tax and pension contributions it was in the expectation I’d retire at 65. Now I’m looking at a retirement age of 67. But I think that could change…
According to the experts, it all starts with demographics. Way back when pensions were introduced in 1929 life expectancy was much lower than today. Back then only 25% of men and 40% of women were expected to reach 65. The whole viability of state pensions was based on those assumptions.
Life expectancy has inexorably increased in the years since. Apparently something like 1 in 6 of us can now expect to reach 100. Many of us will spend a third of our total lifetime in retirement.
Successive governments haven’t grasped the problem. Further raising retirement ages or increasing taxes to pay for more pensioners will both be deeply unpopular moves. So successive governments have dodged the issue. That can’t continue.
According to our speaker, pensions make up around 44% of all government spending on benefits. Based on current intended retirement ages and life expectancy the pension bill will treble by 2050. And that’s at constant prices.
Today there are approximately 12 workers in the UK for every retired person. By 2050 that’s expected to reduce to 4 workers per pensioner. So that’s a third as many workers to fund a bill that’s going to be three times as large. Or in other words 9 times as much tax somebody is going to have to pay.
Ah but all those people will be OK because they’ll have auto-enrolment pensions. Or will they?
Excluding those still lucky enough to be in a final salary scheme, the average UK worker today retires with a pension pot of £40,000. With annuity rates around 5% that will buy you a pension of £800 a year – or about £15.50 a week. That’s an Indian takeaway for one. Of course that is before auto enrolment really kicks in. So how might things change?
According to one on-line pension calculator, an 18 year old on the new living wage who puts away 8% of their pay for their whole working life would end up with a pension of roughly £3,700 per year at age 68. That’s assuming their employer puts in the current requirement of a 3% contribution.
That’s hardly living a life of luxury. In many old final salary schemes employees typically contributed 6% yet could expect to retire on around 60% of salary at age 65. That would have meant the same worker getting £7,800. That’s to say more than twice as much for a smaller contribution…
So what does all this mean? Well, here is my crystal ball.
- Will state pensions still be a universal benefit in 2050? Somehow I doubt it. The demographics will just make it unaffordable – at least at current levels.
- The state pension age will have to increase substantially. Will that affect me? I’m working on the assumption that state pension age will increase to 70 before I hit my current target of 67. I think it is quite believable that will eventually stretch even further.
- Will we see the government increase taxes to fund the massive hike in pension costs? Possibly. However it would be a brave politician who grasps the nettle. Tax rises are deeply unpopular so I expect other measures too.
- Will we see a statutory minimum employee pension contribution with no opt out? I think so. I can see that happening by 2025. It’s the obvious alternative to tax increases. One way or the other we will foot the bill.
- Will the requirement on employers to contribute to pensions increase? Today the requirement is 3% – but for how long? My best guess, based on what I’ve heard – is that eventually employers will have to match employee contributions £ for £ – perhaps up to as much as 10%. Given that many used to contribute 18-20% to final salary schemes they’ll still be contributing a lot less by historical standards.
- Are employers prepared for an ageing workforce who stay on largely through economic need rather than love of the job? Right now I think many aren’t. Adapting to an ageing workforce will be one of the big HR agendas for the next decade. I’ve met so many angry people who will be working longer only because they can’t afford to retire until the state pension kicks in. That population can only grow.
- How will today’s school, college and university leavers feel in 10 or 15 years’ time when us old’uns are blocking up their career path because we can’t afford to retire? I once wrote that retirement was an essential lubricant for the jobs market. What happens without it nobody quite yet knows…
Two final things to ponder. Historically low annuity rates mean you currently get very little return on your “pension pot”. Could the government do more to improve yields? Higher interest rates would help but most economists don’t see that happening any time soon.
Apparently the average age of a first time buyer is now 35. That means I could be 79 before my youngest leaves home. If that’s true, I’ll need to keep a house big enough for my kids way beyond the point I retire. That blows any idea of funding my retirement through downsizing.