MSE News: Pension system 'needs urgent reform'

Money_Saving_Dude

Clifford_Pope wrote: »

That's a self-inflicted burden arising entirely from a persistent refusal to recognise that life expectancy has been increasing.

If the retirement age were being continuously adjusted to reflect life expectancy, then the proportion of pensioners to workers could be maintained at a constant and hence affordable level. It's an artificial non-existent problem.


(Life expectancy 70, retirement age 65, therefore retired/working life ratio = 5/40 = 0.125.
Life expectancy 85, therefore retirement age necessary to maintain 0.125 ratio = 73)

Exactly. It's not rocket science.

wymondham

This is interesting. How many people can afford to pay rent/mortgage AND put in enough into a pension to make a real difference? I know I could'nt until the mortgage was paid - not ideal as obviously lots of lost years, but needed somewhere to live...

dunstonh

wymondham wrote: »

This is interesting. How many people can afford to pay rent/mortgage AND put in enough into a pension to make a real difference? I know I could'nt until the mortgage was paid - not ideal as obviously lots of lost years, but needed somewhere to live...

Most people in my area (which is our area given your post town - I went through Wymondham earlier today).

The problem is really the late starters. Not the early starters. The longer you leave it the harder it gets. Or those that have a credit based lifestyle who are not living within their means.

The biggest issue is that some people don't want to afford it as they have something better to spend it on.

jiMOB

About a month ago I went online and looked at annuities available To make it simple I assumed a single male non-smoker with no dependents. Assumed a pension fund of £100,000 at age 60 and wanting a simple level income i.e. no increases.
This gave a best level monthly income for 'life' of £497.
Doing the maths, this 'best quote' would mean that the £100,000 would last for 201 months or nearly 17 years taking the person to nearly 77 years old before that original money 'ran out' ~ assuming no investment of the initial money.
I then looked at 'life expectancy' (From United Nations (2005-2010) for which it gave 77.2 years for a male
IN OTHER WORDS, ON AVERAGE YOU WOULD DIE ABOUT THE SAME TIME AS THE MONEY AVAILABLE RAN OUT IF IT WAS 'UNDER YOUR MATTRESS' SO WHY SHOULD YOU HAVE TO BUY AN ANNUITY? THESE ARE SOLD BY INSURANCE COMPANIES AND BANKS. THEY CHARGE YOU FOR INVESTING YOUR MONEY AND CAN'T LOSE. IF YOU DIE EARLIER THAN EXPECTED, THEY CAN POCKET THE MONEY AND IF YOU LIVE LONGER THEY SHOULD HAVE 'EXTRA' FROM INVESTING YOUR MONEY. THE ONLY WAY THEY CAN LOSE IS BY MAKING (VERY) POOR INVESTMENTS. :mad:
All the hype about 'living longer' should not detract from the fact that we are being forced to finance these banks and insurance companies with our hard earned pension savings and it's about time that someone started to defend our rights. Until that happens, it's unfair to blame people for not saving enough. We need confidence that our properly invested savings will give a fair return.:(


Incidentally, we aren't living that much longer .....
"Life expectancy at birth in the UK has reached its highest level on record for both males and females. A newborn baby boy could expect to live 77.7 years and a newborn baby girl 81.9 years if mortality rates remain the same as they were in 2007–09."

Unfortunately I was 'not allowed' to give weblinks on this post, but I can assure all the data here is taken from independent or governmental web sites.

hugheskevi

I then looked at 'life expectancy' (From United Nations (2005-2010) for which it gave 77.2 years for a male

You need to be looking at cohort life expectancy, here

Life expectancy for 60 year old male in UK in 2011 is 25.9 years.

As I understand them, the UN figures are life-expectancy at birth, which is irrelevant when assessing how long someone who has already survived to the age of 60 may live for.

jiMOB

Thanks for that.
I've looked at the link which, if I'm reading it correctly, suggests that someone 60 now (in 2011) can expect to live 29 more years.

So, that would, over those 29 years, pay out a best total of £172,956 which seems to be a respectable £72,956 more than the initial pension pot but, using my 'simple maths treatment' that represents £2,516 for each of the 29 years or an annual return of about 0.025% ~ my current account gives a better return than that!

(I know that the calculations are more complex than this e.g. the original pension pot would be reduced by each monthly payment but a return of 0.06% per annum on the original sum would cover the monthly pension payments without touching the capital. I'm sure that an 'experienced investor' should be capable of getting (at least) this sort of return)

hugheskevi

Looking at a situation where the annual payment is taken from the pot at the start of the year (for calculation ease) and an original pot of £100,000 from which annual payments of £5,964 (£497 p/m) are taken you would need to have an annual rate of return of 3.91% on the pot such that it would be zero after 26 years.

On top of that the insurance against living to a ripe old age is a non-quantified benefit, although in fairness, the risk of dying early in retirement is equally a non-quantified risk.

30 year gilt yields according to Bloomberg are 3.95% today, so that all looks about right.

jiMOB

Thanks again ~ just goes to show how tricky it is for a 'layman' to navigate the figures.

The big problem remains that, with a 'simple' annuity (pension investment) your estate loses all the money if you die early yet the figures you give suggest that if 3.91% is needed and 3.95% is possible, it means that even 'the best' annuity provider will get a very good return from an individual's pension pot.

hugheskevi

The ones who die early (and so for whom an annuity turned out to be a bad investment with the benefit of hindsight) subsidise those who live on longer than average and do very well out of the system.

That is the nature of insurance, which is what an annuity is - it insures you against living too long so some win and some lose. Sort of similar to when I buy my house insurance, I don't think of it as being a shocking deal if my house doesn't burn down that year.

I'm aware I'm coming across a bit pro-annuity here. To balance things up a bit...

Annuities definately have their place, but personally I don't think that effectively investing in gilts for 20-odd years is sensible, and would prefer to add investment risk and reward (so income drawdown) which I would expect to result in a better outcome in most circumstances.

Exposing yourself to inflation for 20-odd years by taking a flat annuity is taking a huge risk, but RPI-linked annuities have very high load-factors (ie the amount you expect to get back compared to what you put in is low - about 75%) which makes them unattractive.

But annuities out-perform anything if you live longer than you think, so are head and shoulders above the alternatives for ensuring you have an adequate income should you live to over 100.

So in summary, annuties (or a Defined Benefit pension should you have one) definately have their place and I'd expect to see them as part of retirement planning, but that place for me is once you reach about 70-75 ish and mortality starts to be more of an issue.

And I wouldn't be 100% in one camp - an annuity is highly likely to be a part of the solution, but may well not be the whole solution (ISAs, drawdown, etc).

gadgetmind

jiMOB wrote: »

SO WHY SHOULD YOU HAVE TO BUY AN ANNUITY?

You don't have to.