Prepare now for the great pensions crash

[TrueBlueTerrier]

http://www.guardian.co.uk/commentisfree ... ial-crisis" onclick="window.open(this.href);return false;



During the long boom, many people felt a sense of unease at what was going on. Could house prices really keep rising? Did it really make sense to issue credit cards to people with no income? The answers, of course, were "no". But there was a background roar of irrational exuberance that screamed "Yes!"

Will we make the same mistakes again? The test is in what we do about pensions. Can we spend everything that we earn throughout our working lives, reach retirement age and then live for another 20 years in the manner to which we have become accustomed? Of course not. But many of us are in denial.

Soon, the full force of financial crisis will bring us to our senses. Last week, the insurance and pensions group Aviva scrapped the free pension plan it offered to its employees. On the same day, Aon, a pensions consultancy, announced it was cutting contributions to its employee scheme. Those are straws in the wind. Hundreds of businesses - and their staff - are facing a full-blown pensions crunch.

Even before the recession, pension schemes were looking unequal to the task of supporting members in retirement, not least because people live longer than they used to. But falling stock markets have shaved billions from the value of funds, while shrivelled cash flows make it harder for companies to make contributions. Nearly 300 schemes are already seeking a bail-out from the Pension Protection Fund, the state's flimsy safety net. A mass of bankruptcies would overwhelm the fund.

And that is the private sector. Public sector schemes have crippling deficits running to hundreds of billions of pounds. Some public sector pensions are paid out of current tax income. That means a huge political battle lies ahead as governments must choose between honouring past commitments to retired nurses and police officers or using the money to hire new ones.

Labour has not entirely ignored the problem. There was piecemeal reform after the 2005 Turner report, with an emphasis on gradually raising the retirement age and automatically enrolling all workers in pension schemes. But the overwhelming political and economic tide swept in the opposite direction. Credit mania was a mass disincentive to save. Besides, many of those who thought they were being prudent, investing in share-based funds, now find that their money would have been safer under the mattress. The boundary between sound financial advice and snake oil sales was blurred. The future livelihoods of millions of people were used by the City as casino chips.

All of this points to the need for drastic changes, not just to the way we structure pensions but to the way we think about working life and our relationship with the financial system. The process of educating people about the need to manage a lifetime's earnings with an eye on retirement must start earlier. Employees need to look at their income - and the portion that is "disposable" - differently. They need to save. But that means they also need more reliable places to invest, now that confidence in private sector financial products is so low.

The government should turn its part-ownership of the banking sector to that end. It could, for example, create a national bank for economic reconstruction dedicated to financing infrastructure, renewable energy, social housing. It would issue bonds that would make an attractive and safe investment vehicle for ordinary savers - citizens lending their money to help fix a broken economy and getting it back with interest on retirement.

But there is no sign that Labour has sufficient will or imagination for such a scheme. It also looks unlikely even to address openly the pension problem. That, the government fears, would risk dampening the public mood, putting people off spending and so prolonging the slump.

But recovery will not be hastened by pretending we can go back to the old way, spending on anything to keep the economy afloat. Confidence must be built on stronger foundations than that. It relies on a government that plans for the long term and offers its citizens a sense of shared investment in the future.

[savo]

My take on pensions - must emphasis this is just my opinion and not financial advice...

This is mainly aimed at people who are saving into a Private pension fund, but aspects of it can apply to people in final salary schemes ( and similar) as well..

On current figures, you need to accrue a pension fund of considerably more than £100K to exceed the Pension Credit that the government will give you anyway, anything less and the govenment will merely reduce the pension credit that you would receive for free.
And even if you saved £100K + , and as a result were a few ponds off than if you had done nothing, is it worth it ? You could probably find a better way of spending £100K !!

Pension Credit (currently £124 a week for a single person + Council Tax benefit + Housing Benefit (if you rent) is NOT dependant on your National Insurance record. It is paid according to whatincome and savings you have.

if you must save for a pension, save in a from that will NOTdeprive you of means-tested benefits in old-age, ie. art, antiques, etc., in a form that is relatively liquid and can be cashed in as and when required.

My personal strategy on retirement, will be to take max allowable tax-free cash lump sum, so as to reduce as low as possible the amount of monthly occupational pension received ( this money is wasted money really, as it will just reduce the amount of pension credit i would get.... but i had accumulated these occupational pensions, before i realised they were mostly pointless unlessi could accrue a very large pension fund ) The cash lump-sums would have to be converted into "non-visible" assets such as above, and maybe gold & silver bullion as it tends to preserve its value in relation to normal currencies.

As i say, just my opinion, but might provoke some to consider different options..

[RobertT]

The £124 you refer to includes your state pension and is out of date anyway,it is now £130 per week for a single person.

Pension Credit can only be claimed by people 60 or above,rising to 65 or above between 2010 and 2020.

If you assume someone qualifies for their full state pension of £95 per week,and that's the only income they've got then they will get an extra £35 to bring them up to £130.

Most RM employees with a reasonable amount of service(assuming they're in the pension scheme) will get far more than £130 per week from RM + State pensions,so probably won't be entitled to any pension credit anyway.

[wranglered]

Last two posts very interesting and very relevant indeed...hope more people read them and open up a debate.....

I was planning to ditch my RM pension...now I am not so sure....need to do some thinking thanks to your replies...

[savo]

The £124 you refer to includes your state pension and is out of date anyway,it is now £130 per week for a single person.

Pension Credit can only be claimed by people 60 or above,rising to 65 or above between 2010 and 2020.

If you assume someone qualifies for their full state pension of £95 per week,and that's the only income they've got then they will get an extra £35 to bring them up to £130.

Most RM employees with a reasonable amount of service(assuming they're in the pension scheme) will get far more than £130 per week from RM + State pensions,so probably won't be entitled to any pension credit anyway.

Robert,

thanks for updating the figures,i realise mine were slightly out of date.

Remember that people who qualify for pension credit will also get council tax benefit and housing benefit ( if you renting) as well, those three payments could easily add up to £250 + per week. Now the amount of pension fund that you would have to build up to pay you £250 a week is ?????? - but i can give you an idea - according to my most recent statement from AVC ( Royal mail bonusplan thing that costs me £2.88 per week ) The cost of buying £1000 per annum pension is £29,052
Now multiply that figure by 13 ( £250 per week = £13K p.a ) Pension fund needed = £377,676 - Now compare that to the Value of your benefits on your RM pension yearly update...

I am DEFINATLY not saying you shouldnt pay into a pension ( i,m still doing it at present.... ) but IN MY OPINION you need to either have a bloody big pension fund, OR NOTHING.... anything in between you are going to get screwed over big time.

And remember to get your savings off the radar, i mean even assets like owning your home can be a double-edged sword if it gets taken off you to pay nursing home fees ( we cant all be lucky enough to live in Scotland ! )

Its all about opinions at the end of the day, but i think its a good discussion to have, and better to think about it before you retire

[RobertT]

Hi Savo

If someone qualifies for pension credit then their income must be less than £130 per week,this income includes any pensions(inc.state),income from savings or job.

If they rent their property they might be entitled to housing & council tax benefit,but the most they will actually have in their pocket is still £130 per week.You have to pay all your other bills and have a life with just that - doesn't sound too appetising to me!

Obviously there are lots of different opinions about pensions,and it all depends on your own personal situation.But I calculate that a postman(after all this is a forum about the RM pension) with just 7 years of contributions into the final salary section C,would generate enough pension to take himself over the limit for pension credit(based on current basic pay and pension credit limits).

Personally I'm a home owner and a saver and I'm glad I am.

[savo]

Yep, theres many ways to skin a cat

I was a home owner but sold up mid 2007 as i was transferring to a DO in another part of country. I was very lucky with the timing, but to be fair i do a lot of reading on financial stuff on the net and a fair amount of clued-up people knew that the Kirstie & Phil " houses always go up " mantra was going to come unstuck.

Renting since then, and my equity is banked, not sure whether i will buy again or not, but no hurry at the moment. If i dont buy then i will have to gradually get my savings off the radar, and i am researching ways & means of doing that.

Not sure about your RM pensions figures. I have just over 9yrs final salary service and that would currently get me £2164 at age 60 plus pension supplement. IF i can stick it out at RM, will have a few years on the new CSDB scheme too.

[heapsy]

My take on pensions - must emphasis this is just my opinion and not financial advice...

This is mainly aimed at people who are saving into a Private pension fund, but aspects of it can apply to people in final salary schemes ( and similar) as well..

On current figures, you need to accrue a pension fund of considerably more than £100K to exceed the Pension Credit that the government will give you anyway, anything less and the govenment will merely reduce the pension credit that you would receive for free.
And even if you saved £100K + , and as a result were a few ponds off than if you had done nothing, is it worth it ? You could probably find a better way of spending £100K !!

Pension Credit (currently £124 a week for a single person + Council Tax benefit + Housing Benefit (if you rent) is NOT dependant on your National Insurance record. It is paid according to whatincome and savings you have.

if you must save for a pension, save in a from that will NOTdeprive you of means-tested benefits in old-age, ie. art, antiques, etc., in a form that is relatively liquid and can be cashed in as and when required.

My personal strategy on retirement, will be to take max allowable tax-free cash lump sum, so as to reduce as low as possible the amount of monthly occupational pension received ( this money is wasted money really, as it will just reduce the amount of pension credit i would get.... but i had accumulated these occupational pensions, before i realised they were mostly pointless unlessi could accrue a very large pension fund ) The cash lump-sums would have to be converted into "non-visible" assets such as above, and maybe gold & silver bullion as it tends to preserve its value in relation to normal currencies.

As i say, just my opinion, but might provoke some to consider different options..

Mmmm you do raise a few interesting points here Savo. One thing to bare in mind is that if you take the maximum tax free lump sum, you reduce your monthly pension payment. At first this may sound attractive, as you reduce you liability to tax. However, remember that a smaller monthly pension means smaller pension rises in monetary terms. ie A 5% rise on £500 a month is £25, but if you take the lump sum of 25%, the pension will be £375, giving you an increase of only £18.75. It may not sound much, but over time you lose pace with inflation and general cost of living even more. Also bare in mind is that a long life in retirement will errode the value of a pension further. I deliver to a bloke who worked in my office, but retired 5 months before I started in the job. This August he will have been retired 21 years, as he finished at 60 years of age. It is, as you point out, a very good idea to diversify into other areas of investment. Remember also that reducing your pension to receive greater benefits can be a gamble. Governments are prone to changing the rules, and I can see further big changes ahead in light of the recent financial situation.

[RobertT]

Not sure about your RM pensions figures. I have just over 9yrs final salary service and that would currently get me £2164 at age 60 plus pension supplement. IF i can stick it out at RM, will have a few years on the new CSDB scheme too.

Your £2164 would give you £41 per week if you were 60 today,plus the pension supplement up to state pension age. When your state pension kicks in you'll get £95 state pension(assuming full NI conts and no S2P) plus £41 from RM,and any income from other pensions you have.Hence you will already be over your limit for pension credit,based on 2009 figures.

I don't know how much you have banked from your house sale but your idea of buying art or antiques is a very risky one IMHO. I wish you luck.

[savo]

Yes you are right with the figures Robert, in spite of my preaching, it looks like i could be one of many caught in the "smallish occupational pension" trap and hence get none of the hand outs that the feckless will get. I will obviously take max lump sum i can, which will reduce the weekly pension i get.

Cheers for the good wishes on the investments side, art & antiques was just one of a list i am trying to research, i realise there are very few truely safe investments nowadays, unless you are a banker who is playing the global casino and gets massive bonuses when his bets win, and gets his losing bets covered by the tax payer.

Yes, the state benefits system might change - as the demands on the state become ever greater ( highly likely ) , so the penalisation of those with private pensions/income/savings might become EVEN GREATER - Nobody knows......

Good discussion though, possibly a bit of an eye-opener for some..

[heapsy]

I did post this somewhere on here before, but if it helps anyone then here it is again. The following link takes you to the Department of Work and Pensions calculator. Here you can input your age etc, and it tells you when you get your state pension, according to age. Just thought it might help some. http://www.thepensionservice.gov.uk/sta ... ulator.asp" onclick="window.open(this.href);return false;

[DGP1]

You have to remember that Government benefits can be taken away if they feel like it so I really think it's better to make sure you have a pension coming in rather than relying on a state benefit that may not be there in the future.

[POSTMAN]

I did post this somewhere on here before, but if it helps anyone then here it is again. The following link takes you to the Department of Work and Pensions claculator. Her you can input your age etc, and it tells you when you get your state pension, according to age. Just thought it might help some. http://www.thepensionservice.gov.uk/sta ... ulator.asp" onclick="window.open(this.href);return false;

Thanks,i've put the link in a stickie.