Unfortunately this was deleted in error and is therefore republished
This week we shall be realists and look at how pensions are rather than what they should be, although we always live in hope that common sense will prevail.
Returning to basics, we ask the question what is the minimum pension level and what do we need to save to achieve it, how long is a piece of string comes to mind, but we shall ignore that.
General figures of £10 to 12,000 per year have been put forward, some half of the average wage, with people above this managing comfortably; it is below this that the problem arises. However there is room for some wealth redistribution within the pension system, particularly if State pension is brought into the problem.
The new single tier pension effectively guarantees an income of £144 per week or £7,500 per year, which is at basic poverty level, the new worker pension scheme Nest is intended to bridge the gap.
Good defined benefit contribution schemes report 5% growth, even over the recession and have been 9%+ over a 25 year period. At 5%, final pension should be four times annual contributions over 40 years; taking this as a basis, we can arrive at the expected pension outcome.
The new worker pension scheme Nest has automatic enrolment with total contributions of 8% , made up of 4% member, 3% Employer and 1% tax relief, which over 40 years should yield a pension of 32%of wage in real terms of today’s prices..
An annual wage of £10,000 is probably the minimum viable entry level, higher if tax allowances reach this figure. Contributions would therefore be £800 per year giving a pension of £3,200 and a final pension of £10,700 with the State basic pension.
This rises at £20,000 to £6,400 +£7,500, giving £13,900 per year which is comfortably above the recommended levels and therefore a good pension income in real terms.
Currently there are some 20 million people in work but with no pension provision outside that of the State NI system, the new scheme is a back door method of increasing contributions to give better pension provision. It is in everyone’s interest to support the scheme, it is better than nothing and without major changes the State cannot afford more.
However the new scheme needs changing, it is based on defined contributions and outdated annuities and is not fit for purpose. Pension scheme need good firm foundations, DC schemes are building your fortress against pension poverty on shifting sands.
They are unreliable, lose money in real terms and with the present annuity position give uncertain outcomes, which are liable to change; having saved diligently for forty years you find yourselves subject to market fluctuations outside your control and too late to make changes or wait for better times.
Pension management needs expertise outside the grasp or knowledge of ordinary people, they are the professionals and paid well to do their work effectively, so why should the risk be transferred to members, who do not have the experience to manage it.
There is a reluctance to guarantee outcomes, hence the aversion to the defined benefit schemes even though they are economically more efficient and being managed well elsewhere. Even avoiding this there are still major benefits in group schemes which run through both work and retirement.
Risk can also be reduced, the days of the fast buck are over and investment should be in the UK, where it is sorely needed and although returns are more modest it is still possible to get 4 to 6%or higher and average out at 5%, which can reduce to 4% for the retirement fund portion where the major fund accumulation has occurred, once the scheme has established
To be continued next week..
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