Pensions uncertain in the future?

stinktankcynic

With everyone going to live to 100 or more, then either pension ages will increase or annuities will fall?

With indexed linked annuities at 3%, is it possible that even if you have a huge pot, and with the supposed increased longevity, that annuities will fall to 2-3% normal annuity on small pots. Also if the tax free lump sum is removed, then pensions become worthless?

The system seems unfair. Getting rid of sp2 and the new flat pension makes it even more unfair.

CLAPTON

what's unfair about living to 100 or more ?

what's unfair about increasing the pension age?

what's unfair about annuinity rates decreasing

what's unfair about a (semi) flat rate state pension?

DreamerV

I get a little confused. On the one hand they say many people will live till 100, and on the other hand they say my generation will be the first to die before their parents (on average) due to obesity and related illnesses.

I'm, at 30, planning for my future retirement, taking into account perhaps living to 95. I do hope pension ages don't rise anymore. I won't be able to retire and get state pension till 67/8 as it is (not that I think the state pension will exist for all in future). I'll be maxing out pension contributions and my employer will put in double, and I'll be throwing my flexible benefits towards pension too. Even then the pot won't be huge. Not sure how everyone else is going to live.

I've been told if I'm not well off, other people certainly won't be. However I pointed out, if they're living off bread, and I'm living off bread with value cheese, I'm not going to feel much better...

I think the pensions crisis is going to be horrendous, more so than they think. I don't think the government particularly cares, as they'll be dead before it hits majorly.

grey_gym_sock

currently, annuity rates are artificially lower than they would otherwise be because of QE. which will have to end at some time, though perhaps not very soon.

it's also perfectly correct that greater LE will lead annuity rates to fall. it's just that separating the 2 effects (QE and LE) is a little tricky.

however, the general answer to very low annuity rates - if you have a pension fund which could buy an annuity - is not to, but to use drawdown instead. the usual rule of thumb is that you could draw 4% from a sensible mix of investments, with a good chance that you can keep increasing the income in line with inflation, and without running out of money. so that looks a better bet than a 3% index-linked annuity. though it has it's own risks - it's no more than a rule of thumb.

that's the practical answer. as for whether it's fair, ... greater LE would cost cost the state a lot in pensions if there were no rule changes in an attempt to make it more affordable ... that's the basic rationale for making some kind of changes.

i've no particular defence of the exact changes that are proposed. nor i am clear exactly why you think they're unfair. what would you propose instead?

DreamerV

In answer to Clapton's very valid questions, I think it's great people will live longer on average. I just hope the NHS can cope to give us all a decent enough quality of life. Increasing the pension age - I guess is fair if we feel younger at an older age compared to previous generations. I don't think it's unfair that annuity rates are decreasing, but it is in a lot of ways harder for younger people now to be comfortably well off in later life. We may not have the benefit of house prices increasing greatly in value, nor the final salary pension schemes, nor good annuity rates. I actually think a semi-flat state pension seems ok - it's better than there not being a state pension for those who save hard for their future.

I think the solution is pension education (and financial education) from a young age in schools. And perhaps free credits for the population that can be used on evening classes taught my professionals/companies willing to give up an evening now and again to educate people on financial/pension issues.

hyubh

stinktankcynic wrote: »

With everyone going to live to 100 or more, then either pension ages will increase or annuities will fall?

With indexed linked annuities at 3%, is it possible that even if you have a huge pot, and with the supposed increased longevity

Make your mind up. You start by confidently asserting that 'everyone [is] going to live to 100 or more', then in the very next paragraph talk of people's 'supposed' increased longevity. Which is it?

if the tax free lump sum is removed

Who is proposing that? Go on, name them.

If anyone in their twenties or thirties doesn't want to bank on current tax free lump sum rules remaining what they are now when they come to retire I wouldn't blame them - in fact, I'm one of them! However, idle speculation is just that - idle.

The system seems unfair. Getting rid of sp2 and the new flat pension makes it even more unfair.

What is 'fair'? A flat rate state pension is 'fair' in one sense: everyone gets an equal share, a bit like how everyone should get their 'fair' share of equality before the law, which is to say: the same share.

Anyhow, what's reform of the state pension got to do with whether tax free lumps will be abolished at some unspecified time in the future...?

hugheskevi

As the Pension Commission said, there are 4 choices at the aggregate level:

1. Work longer
2. Save more
3. Pensioners become poorer relative to pensioner's position in society today
4. Greater transfers, ie tax younger people more to give to older folk

Given the economic developments since the Pension Commission report, saving more looks improbable - the increase in savings from automatic enrolment will be offset (and maybe more than offset) by the reduction to public sector pensions and the continuing decline in defined benefit provision.

Greater transfers (ie more tax) also seems improbable, given the burden already being put on younger folk due to the deficit reduction measures.

Which leaves working longer and being (relatively) poorer.

Working longer is possible - in the 1950s the average male retirement age was 67. But that will have its limits, and it is hard to envisage a future with large numbers of over 70s working, let alone over 75s.

So pensioners will also probably have to become relatively poorer over time (the inevitable consequence if the 3 things above don't adjust). That is also possible - on average current pensioners have very high incomes in historical terms.

It isn't difficult to envisage the evolution and relative decline of pensioner incomes, as pensions based on private sector defined benefit firstly erode in value as they are (at best) price uprated in payment, before ceasing on death of the recipient and their spouse. Meanwhile new cohorts of pensioners are increasingly reliant on State Pension whilst their private pension is much lower than the historical private and public sector Defined Benefit pensions.

Hopefully the working longer allows a bit more time for saving, but more importantly offsets or even reduces the increased time that would be spent in retirement due to higher life expectancy. That may well cushion the lower relative living standards (ie get a pension which may similar to those of existing pensioners, but for a shorter period of time).

An interesting group will be those not able to work up to or into their 70s (either due to unemployment or ill-health) and who haven't made high levels of pension saving in their working lives. Given the pressure on unemployment and disability benefits, that group could end up with a long period of low income at the end of their lives.

kidmugsy

Given the way the government (and its unlamented predecessor) has funked making the scale of changes necessary in the pensions of its own employees, it seems likely that the State Pension will be subject to many small, timid manipulations, if it is to survive at all.

dtsazza

stinktankcynic wrote: »

With everyone going to live to 100 or more, then either pension ages will increase or annuities will fall?

This is a mathematical certainty given the premise. If an insurance company expects to have to pay out for an average of e.g. 25 years instead of 20, then for the same lump sum they are clearly going to have to pay a reduced annuity. Or vice versa, if you want the same annuity as before, then you'll have to defer taking your pension for another 5 years, until they can pay the "20 years expectancy" amount to you again.

I wouldn't call that unfair, it's just the economic reality.

hugheskevi wrote: »

As the Pension Commission said, there are 4 choices at the aggregate level:

1. Work longer
2. Save more
3. Pensioners become poorer relative to pensioner's position in society today
4. Greater transfers, ie tax younger people more to give to older folk

...
So pensioners will also probably have to become relatively poorer over time (the inevitable consequence if the 3 things above don't adjust).

That is a very good list, and I agree it covers all of the options.

I take slight issue with your wording (that I've highlighted), which is possibly just an ambiguity. It can certainly be read that an individual going-to-be-pensioner has to become relatively poorer, as if they don't have any choice in the matter. But while an individual cannot invoke option 4, they certainly have the other options open to them as choices.

As it happens I do agree with your likely meaning, that the cohort as a whole are likely to underfund their pensions and so end up relatively poorer in retirement. I just don't want your message to be taken as one of despair; that this is going to happen to you dear reader, and there's nothing you can do to stop it. The real message is the opposite - that if you don't save more, then you'll need to work for longer; and if you don't want to do that either, then you'll be poorer in retirement. Assuming the latter two don't appeal, then start thinking about how to put more aside!

Jack_Griffin

stinktankcynic wrote: »

With everyone going to live to 100 or more, then either pension ages will increase or annuities will fall?

That's a story in the news, my feeling is that longevity rises will flatten out dramatically at some point. It doesn't quite square with the obesity crises stories.

ozzage

The answer is to save more, and to start saving earlier. That would make a massive difference.

At what age do most people start taking their pension and retirement seriously? I have no idea of the stats, but certainly WAAAYYY too late.

Auto-enrolment is a good start, but the percentages need to increase massively. It's a pity that people are too stupid to realise that it's good for them.