Thursday, 17 October 2013

Is there a problem with our pension system, or is it just about our expectations in retirement

I have read some fascinating articles of late, and heard different people, all claiming that our pension system is broken. As a father of two children our children are today not going to school because teachers are striking over a number of issues but one of these is their pension. I thought about this, on one hand people are saying our pension system is broken and on the other we have a minority who don’t appreciate what they have.

In this blog I just want to explore whether our system is broken or whether our expectations need adjusting. Only twenty years (perhaps less) ago our expectation when agreeing terms for a new job was that we would have a guaranteed pension at retirement. Many private sector companies offered these schemes especially in the financial sector. Fast forward to today and very few private sector employers offer these schemes and really the only way to get this type of scheme is through the public sector. 

The other thing I remember was that for some of the private sector pensions you didn’t have to pay for the benefit. So effectively in many of our lifetimes we got as part of our employment a free guaranteed pension.

For those unfortunate not to have a gold plated pension they saved into a pension to provide for their retirement. Often with no real knowledge of what that would provide. The expectation of what they would receive was always based on the past. I remember as a rule of thumb £100,000 pension would provide £10,000 pension. 

Fast forward to today and there is only now a realisation that people are living longer (20 years plus in retirement) and this means that retirement income has to last longer. Of course pension schemes have to move their retirement age and increase contributions otherwise they cannot afford to pay the benefits but equally individuals who don’t have these schemes have to take on this responsibility. 

If we focus on the fact that the pension system is broken I think that is just one element. The key as I have argued a hundred times is that of understanding what our expectations are in retirement and how we are going to achieve this. The new state pension is a great starting point especially for working couples; this gives a solid base of £7,000 plus each at age 67. An ISA can deliver a tax free income in retirement, and a pension fund can be part of the mix. Of course these are not the only sources of retirement income; for example buy to let property can deliver an income.

My point is this whether you are in gold plated pension scheme or not the first step is to accept that the norm that we knew has changed. This means that for many of us we have to work longer, retire later and pay more for our benefits. To avoid disappointment we need to be thinking about what we need in retirement and how we are going to achieve this, and more importantly we need to understand that pensions are not the only source of retirement income. 

In summary I don’t think there is a problem with the pension system, I just think we need to adjust our expectations of what to expect in retirement, when this will be and how we fund this.

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