The demise of the State second pension and SERPS and the effective replacement of the basic pension with a universal welfare benefit pension at poverty level, leaves the majority of the hard working population with little alternative to increasing their retirement income.
If you are one of the 10% minority able to join a well managed funded Company defined benefit scheme, then take up the opportunity, even if it is the less attractive defined contribution scheme, although care has to be taken to ensure the funds are independent and not disappear with the Company.
Public Sector workers are in a difficult position, the unfunded nature and State attitude leads to increasing contributions, diminishing returns and later retirement, if you are over 40 then you probably have little choice but to grin and bear it. Below that if a good sound opportunity to opt out occurs, it needs serious consideration.
The new State scheme joins the existing defined contribution schemes to give second rate pension provision, which combined with the annuity collapse offers little guarantee of a good and secure outcome. Saving interest levels are well below inflation so that ISA’s would lose money in real terms.
Property prices are now too high to give a good reliable rental return, although there are still potential areas if you can buy at the right price; holiday caravans, chalets and lodges are still at low enough prices to offer a reasonable return. Flat complexes are sometimes available offering 6 to 8% return.
Any money available for pensions may be better spent on reducing expensive borrowing; mortgage still range around the 6% mark, credit cards around 18% and store cards up to 29%. These are all much higher levels than your money can earn in savings and therefore a more worthwhile return to pay off.
This comes down to managing your money effectively, which is not so difficult as people believe, paying energy and service bills on a direct debit budget plan, reduces cost and can be geared in to income in the monthly budget. Paying credit/ store card payment by direct debit on the due date reduces charges and also allows monthly borrowing at peak demand by using the card.
Many Building Societies have flexible mortgages or allow re-borrowing of extra payments, so paying off extra amounts reduces interest costs now and in the future, clearing the Capital amount faster. This then allows greater pension savings later, if returns improve or investment in building up a Capital Fund, possibly in property to give future income.
Such property investment could be the normal process of upgrading, with downsizing at retirement to release Capital and can offer great flexability in saving for pension provision.
There are growing number of small investment co-operatives, some Council sponsored to invest in Local Companies, which are reported to give 6% returns, quite adequate to build up a good pension fund. Many ways therefore exist to finance future pension provision and group schemes can reduce the hassle and risk.
The question therefore arises of how much do I need to save or accumulate in a fund. There appears at present to be little alternative to the forced labour camp of NI “contributions”, so one must accept the basic State pension as the starting point and hope it maintains its real term value of £7,500 per year income.
One needs to top this up by at least £5,000 per year to £12,500 and if a couple a similar amount to some £20,000 total. At a 5 to 6% payment or drawdown this requires a fund of £80 to £100,000, suggesting savings of £1,000 to £1,400 per year actual or in kind.
This needs to be compared with the new worker’s pension scheme projected to yield a 1.8 replacement value from 8% contributions (4% member), on a £25,000 wage, £2,000 ( member at £1,000) saving this could give a £3,,600 pension, possibly similar but without the personal control, satisfaction or security.
Of course the real alternative is a strong lobby to obtain a fair pension return from NI contributions, which is proportional to the monies paid, or better still to rebate 50% to an independent provider to invest in a proper funded scheme, giving value for money. The whole mess needs sorting urgently.
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