Pensions have always been promoted as a way of achieving the sort of financial freedom we are all looking for, albeit in your later years, when you have retired.
Unfortunately pensions are dependent on the success of the stock market in order to deliver the promises they make and the stock market simply isn’t performing as well as it used to. Each year the returns diminish and in 2006 Moneyfacts reported that pension payouts have fallen by a massive 57 per cent in the last ten years. Since then things have got worse not better.
If you had retired in 1996 after paying £500 a year into your with profits pension plan for twenty years, you would have acquired a fund worth, on average, £61,592.
Compare that with a 65 year-old retiring this year. After making the same contributions that person would only have £26,168. This is an astonishing change of fortunes.
Remember many people took these policies out, not only to fund their retirements, but also to pay off their mortgages. Most people with endowment policies will have already received a letter telling them they need to increase their contributions in order to secure the returns they were expecting.
But the sorry story does not end there. The annuity rates that you can achieve with your pension pot have also fallen dramatically. This means that not only do you have a pot that is half the size of the one you were expecting but the return you will get pound per pound has also fallen.
And yet people are still being sold these products and encouraged to invest more of their money to make up the shortfall. The argument is that if you put money into these kind of products then you will get tax relief at up to 40 per cent on your contributions but you don’t get this kind of tax relief if you put your money into a bank account. This is true but with more and more people wanting to take out annuities there is an increasing imbalance between supply and demand. This makes me nervous. As an investor I know that supply and demand is the key to the performance of my future investment.
I am very nervous about the state of the stock market. Looking back over the last 110 years the only time the stock market did well was from 1980 to 2000 and I wonder if the good days have gone forever. Just look at the numbers:
- We are all living longer. In 1908, the year the first state pension was paid out. A man of 65 could expect to live until he was 76 (11 years to finance). Today a man of 65 could expect to live until he is nearly 82 meaning the pension must last 17 yea – a 54% increase.
- At the very time you need 54% more money there is a massive decrease in the number of people paying in to pensions and a massive increase in the number of people taking out. In 1960 there were five workers supporting every retired person in the UK. That figure has now fallen to 3.5 workers for every retired person in the UK. By 2015 it will be down to 3 to 1 and by 2040 it will be 2 to 1.
- So what does Gordon Brown do to help matters? He goes in the back door and props up his irresponsible spending by removing the tax refunds on dividends enjoyed by the pension funds. This effectively gave Brown between £3.5 billion and £5.0 billion pounds of your pension pot each and EVERY YEAR. This is the very same man who will blame you for not putting into your pension whilst he has made sure that all ministers have a guaranteed final-salary pension scheme paid for by – yes, you guessed it – YOU!
Now tell me we haven’t got a pension crisis.
I accept that since I am not an Independent Financial Advisor I am not in a position to give advice, but what concerns me is that the numbers just don’t add up.
If you believe that the stock market will deliver the same kind of returns that it did in the eighties and nineties then fine, clearly these products have a future. But if, like me, you think this is good money after bad then you need to find an alternative way to finance your lifestyle when you come to retire. One thing is for sure; you cannot close your eyes and hope for the best. There is only one person who is ever going to look after your best financial interests – and that is you. Everyone else is on the make.
You could of course take the government’s suggestion, which is to work another five or ten years in order to make up the shortfall. Or, as one of my friends suggested, you could always downsize in order to live within your means.
I suspect that in the years ahead most people will have to do both in order to survive.
Whilst this may sound all doom and gloom, in reality I remain very optimistic about the future, and indeed the opportunities that still exist for those who look. This is not a weary long-winded moan but a call to action to all readers to open their eyes and see that the financial game being played out in this country is not in their short-term, medium-term, (and certainly not) long-term interests.
You do not have to be a victim of the debt culture that has embraced western society over the last thirty years.
There is an alternative for those who actively seek it.