Wednesday 11 September 2013

John’s Blog No. 141 – Pensions –Pensioners 4

Of course pensions are made complex to confuse you, but all you need to know is the pension replacement or yield factor. For every £1,000 per year you save over 40 years, how many 1,000 will it yield in pension payments when you retire: DC schemes are quoted at a low 1.8, giving £1,800 pension per year in real terms. If your wages and contributions keep up with inflation and the Fund grows to also keep up, then over 40 years the Fund will build up to £40,000 in real terms, with payment drawdown at 6%, this gives £2,400 pension, a factor 2.4, which is the minimum in real terms, without losing money. Even with the worst 65+ population projections this is sustainable in a group scheme and is the Revenue recognised drawdown rate. Managed modestly your Fund should grow much faster, 5% is currently reported, with some rates even higher, this would double the expected returns. You should also have the choice of when you retire, if you have built up an adequate fund, this could be any time after 55, or if you prefer to work, delayed later, but your choice. Life expectancy is another confusing and vague area, it is generally assumed to be the time you have to live from that age, which is wrong. It is in fact the time taken for the numbers to halve from that age, you have an even chance of living that long or of dying any time between, at age 65 it is 18 to 20 years, you might live to 66 or 85, some of you will but it is an individual thing. Health and the quality of life is another asspect you may be alive, but can you do all the things you want to, currently we are healthier and more active at 65 than we have ever been and record numbers are surviving to 65, but the latest healthy living age is just under 69. Eight years from age 65 is the average time given as free of disability, it obviously depends on lifestyle, fitness and activity, but ageing inevitably takes effect some time and you do not have the ability or urge to do all the things you want to do or planned to do. Active life starts leaving you behind and the pace gets slower. This raises the question of retirement age, the mantra “live longer, work longer” is not proven or justified and it is criminal to force people to lose enjoyable retirement years to save small amounts of State pension money. It should be a matter of personal choice and whether you have contributed enough to support yourself. Some people have no life outside work and others little within it, bursting to do all the things that work, financial and family responsibility have deprived them of. A good retirement age is 55, children will be grown up and if you planned it well the mortgage will be gone and you will have had over 35 years of savings in the pension fund, including NI contributions. You will still be active and have the energy to do all that you want and of course you can still work part time to get the best of both worlds. In any event 65 is the latest time that people should be forced to work, but it should not be compulsory but a matter of choice. We need to face the prospect of life and death positively, if we are to get the best out of life in retirement, is our living style detrimental to longevity and how can we change it? How many of our relatives and friends are dead and why? What is our family inheritance in this respect or our present health and do we want to improve it? Alternatively do we just settle down to a relaxed living, fitting in what we can and enjoy life, our children, grand-children and more if we are lucky; doing just what we want to and catching up slowly on all the things we wanted to do, living life to the full. Pension savings accountability is an important aspect of this decision, there is none whatsoever in State schemes, in spite of large contributions in National Insurance and Public Sector pensions, there is no firm and binding relationship between what you pay in and get out. Benefits and rules are changed to suit the Public Purse, without reflecting what your savings should have accumulated or earned. It is run as a benefit welfare syatem of State largesse, with ever increasing contribution demand and decreasing and delayed payment, regardless of the individual. There are alleged rules relating years of service accumulation to percentage of average wage, but these are meaningless when the goal posts are constantly being shifted, without discussion or concern for the individual. It results from the lack of individual funds and final aims or objectives, if you know that you have a fund of say £100,000 which could give a pension of £6,000 per year, then you can decide if you can afford to live on it. This is the basis of all pension Funds except the State, your savings; your money; your decision and your choice and anything different would be treated as a criminal abuse of funds. Why should the State be different, they deduct the contributions from your wages whether as NI or other and have an obligation to protect and return it, when you need it, subject to obvious safeguards, without redistribution to others or themselves. The time for a major change in attitude, outlook and treatment of such individual savings is long overdue.

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