Wednesday 7th October

Some are lucky and many are not, and many more in the future will be even more unlucky.  Pensions truly are a lottery.  Many in the Public Sector and quite a few who worked in the Private Sector too are on Final Salary schemes, where they get approximately one eightieth of their final salary for every full year they worked for that organization.  There is usually a maximum of forty years, giving some half of their final salary.  Years ago when these schemes were designed people maybe lived until their mid-seventies, but now we are living to our late eighties and this is increasing year on year.  This means that most people on Final Salary schemes will be receiving far more than they and their employers ever put into the scheme, allowing for inflation too.  Most final salary schemes are running huge debts and have closed their doors to new entrants.  The Government is still in protracted negotiations with the Public Sector trades unions, and will soon have to decide whether to simply impose new conditions on workers or continue for more years by paying out very generous pensions to these fortunate workers.  New people joining the public sector will undoubtedly be on far poorer pensions.

And some of us have never worked for a company which had a pension scheme, myself included and have had to make their own provision.  I am paying over £400 a month into my Private Pension (my employer has never paid a penny), and will receive not much more than that back when it matures.  This is because annuity rates are on the floor.  An annuity is basically what you have to buy when your Private Pension matures.  A company, often the same one as you paid your pension into, will take the lump sum in your pension pot and “invest it” and take a fee and pay you a guaranteed annual sum.  They do their calculations based on what they can get by investing the money and working out the probability of how long you will live for.  And as interest rates are next to zero, and people are living far longer these companies are paying out very low annuities at the moment.  You may take a lump sum of 25% of your ‘pension pot’ tax free; and even though the Chancellor now allows you to take as much of the rest as you like this will be taxed, as of course will your pension be.

And now the Government are bringing in ‘Auto-enrolment’ where all workers will have to be enrolled in a pension scheme.  Those workers can ‘opt-out’ but this is not as easy as it sounds.  But the amount being invested will be so paltry that when these, mostly low-paid, workers eventually retire (maybe in their late eighties) they will get a tiny pension out of it.

We are sitting on a demographic time-bomb.  People are living far longer and often working fewer years (school leaving age increases and many go on to Uni or Colleges) so the opportunity for paying in enough to give them a decent pension is shrinking.  This is why successive Governments are frantically pushing up the retirement age.  The largest element of the Benefits bill goes to retired people – but it will be a brave Government that tries to change this, as these same people are the most persistent voters.  The stark truth is that we cannot dream of reducing taxes and maintaining pensions at the same time, but it will take a brave politician to square the circle. In the meantime, pensions remain a complete lottery, with often those poorest when they worked being the poorest in retirement too.