Hitchhikers blog posting to Pension Provision
By clive on Jun 29, 2009
The Hitchhikers Guide to the Galaxy suggested that there were 3 stages of evolution
- How do we eat?
- Why do were eat?
- Where do we eat?
- Why do I need to invest more than the minimum?
- \*\*\*\*, how much can I afford to invest?
- Where shall I invest? I have no idea which fund to pick
- Who can I trust to advise me?
I have spoken to a number of people so scared that they will get bad advice in the 4th step in pension panic evolution, that they got no advice and do nothing for the 1st 3 steps.
Lets do some futurology. As the mist in my pension futures crystal ball clears I see
- The basic state pension will keep you alive, but little more
- Only saving at the default rate for a Defined Contribution Pension Scheme will leave us dissapointed and poorer than we think we should be
- It is going to take at least 10 years the political minerals to develop to tackle the unfunded time bomb which is Public Sector Defined Benefit (Final Salary scheme), estimated at 65% to 85% of GDP and all off balance sheet to be paid for by future taxation
- Pension tax relief for higher wage earner will be nibbled away at as the threshold is reduced.
Not a very ambitious crystal ball I grant, it was quite cheap because it is unregulated.
I was very fortunate to meet a retired R.A.F. officer while on a diving holiday in the Maldives around 8 years ago. He managed to explain that the easiest way to understand how big a investment pot to aim to accumulate when you retire is to work backwards. The spirit of example he gave me goes like this:-
Lets assume I am a member of a Defined Contribution Pension Scheme and want 20,000 pension income per year when I retire.
Assume predicted annuity rates at 5%. Could be more or less in 2040, but lets assume 5% for easy sums.
So to give us 20,000 pension income a year we would need to have squirreled away 400,000 pounds available to buy a pension at the time of retirement.
For an individual who is 35 and intends to retire at 65 (makes the sums easy). If to date they have saved a pension pot of 100,000, they would need to save an additional 300,000 pounds more to meet their 400,000 pounds target. That is a need to save around 10,000 in 2009 pounds (remember inflation) each year over the next 30 years.
The default on many DC pension schemes is around 10% including company contribution so if you earn 40k, that means you would be saving around 4k a year into a pension which is about 40% of what might be needed to keep you in the beer to which you wish to become accustomed post retirement with an income of 20k a year (must remember to adjust for inflation of course).
We really should put a margin of error in for the inherent complexity of inflation, investment return and annuity rates when one retires. Even a basic spreadsheet user who can use Google can factor in some element of inflation vs investment return over 20 years. Of course, it will be wrong, but it should scare you into the right ball park.
Apart from Alan the retired RAF officer, no one I have talked, professional or otherwise, has suggested setting a broad goal to work towards. If you are a project manager or product developer, you will know the best way for a project to fail is not to know have a clear idea of the intended outcome. Things might change on the way as the future is unknowable, but you have a goal to work towards which can be modified as knowledge about the future unfolds.
This is the real problem I have with the current and proposed future FSA policy, it makes no provision for setting a intended outcome of the project( of having a secure retirement), instead suggests a save and hope for the best approach. No clear goal setting make it very hard to reach a goal.
If you think you have just read any advice above, you have not. Note the title as a blog posting not a guide.
I advise you to get a Scottish Wife, they don't spend much money That is an example of what financial advice looks like.
So some useful links which I am not advising you to think about looking at include
- Sun UK Pension web site
- Public sector final salary schemes off government balance sheet
- A web site where you can search the Internet for the words "pension" and "uk"
Some Pension Policy changes that I woud like to see made include
- Put all MP's into a Defined Contribution Pension scheme. This would help focus their minds on the underlying pension crisis.
- Any consumer financial advisor must give at least 1 hour of free financial goal setting (as above, hopefully better and more complete) before they can start charging.
- Empower the purchase of Corporate Bonds in demoninations of less than 50k (5k or 1k) within a SIPP Pension Plan. Some European rubbish I need to fully understand the background to, but is a real pain is trying to build a risk adjusted portfolio.
- Require financial journalists to be regulated and accountable for the advice they give in print.