Direct Benefit Pensions - who paid?

bigadaj

I agree that the status quo is unfair in terms of inter generational pensions, and I'm not sure the current approach is or will be fully sustainable. Committing young people to pay older generations pension when the numbers of young people are exceeded by retired isnt sustainable, and this is only part of the issue when you extend this to care home fees and the huge extra cost of older people to the nhs.

It is interesting to run projections in terms of finances, and project ahead but the desperation of some many people to retire in their fifties is interesting. When you consider so many people don't start a proper job until their early or even mid twenties, and are likely to live until their mid eighties. So out of over eighty years, with a hope or even expectation of being retired for 30 years, accruing that wealth in barely 30 years will be a challenge for a large percentage of the population. The most useful and significant variant for many will be the retirement age as every year less in retirement not only reduces expenses but provides more resource for accumulation. It seems to me that the important thing is your choice of career, as so few jobs are now physical to the extent that it creates a challenge to continue with age, it's just a perception of stress or hassle, so either do soemthing you like doing or soemthing that pays so well you can give it up in your fifties, though even the latter option sounds depressing to me, almost wasting your youngest years to provide income for your older years, to me most things are or were best achieved at a younger age though others opinions may differ on that point at least.

hugheskevi

My spreadsheet consists of approximately a dozen tabs

Mine is 21 tabs, although 4 of those are charts.

takes into account the difference in the value of a 2014 £ versus a 2050 £

In price or earnings (or similar) terms? Using prices over such a long period wouldn't be a good idea.

For instance, based on ONS data if I retired today as a man of 65, I could currently expect to live to be 83 (on average).

That looks like it is based on a period basis. Cohort life expectancy is 86.5. For pension purposes this is an under-estimate, as those with any pension of note will have a higher life expectancy than average.

I've seen assumptions used in pension scheme valuations of 45 year olds today (who are members of the pension scheme) being expected to survive to about 90 on average for men and a couple of years more for women.

using a discount rate of 5.67% - average BofE rate since mid 80s

To value annuities, it would be better to use 20 year gilt yields, possibly with a bit of long-dated corporate yields added. Such yields would give the yield from long-term very low volatility investments, which is essentially what an annuity is.

That will lead to a much lower discount rate and explain your findings.

Say there is a market crash similar to 2008 in the few months before I retire, I could easily wave bye-bye to 40% of my investment in the blink of an eye.

That would only happen if you had a very inappropriate asset allocation.

Sure, I could factor in the worst case on all fronts, but I can't realistically afford to put aside 80% of my monthly income to fully mitigate all of my risks! Nor could anyone else, I imagine...

Coincidentally, I recently calculated that I'm saving about 80% of household income, which has mostly been going into pensions in recent years. Sadly the Annual Allowance and diminishing carry-forward availability are going to lead to savings being diverted into other vehicles soon

davechas

bigadaj wrote: »

I agree that the status quo is unfair in terms of inter generational pensions, and I'm not sure the current approach is or will be fully sustainable. Committing young people to pay older generations pension when the numbers of young people are exceeded by retired isnt sustainable, and this is only part of the issue when you extend this to care home fees and the huge extra cost of older people to the nhs.

It is interesting to run projections in terms of finances, and project ahead but the desperation of some many people to retire in their fifties is interesting. When you consider so many people don't start a proper job until their early or even mid twenties, and are likely to live until their mid eighties. So out of over eighty years, with a hope or even expectation of being retired for 30 years, accruing that wealth in barely 30 years will be a challenge for a large percentage of the population. The most useful and significant variant for many will be the retirement age as every year less in retirement not only reduces expenses but provides more resource for accumulation. It seems to me that the important thing is your choice of career, as so few jobs are now physical to the extent that it creates a challenge to continue with age, it's just a perception of stress or hassle, so either do soemthing you like doing or soemthing that pays so well you can give it up in your fifties, though even the latter option sounds depressing to me, almost wasting your youngest years to provide income for your older years, to me most things are or were best achieved at a younger age though others opinions may differ on that point at least.

Very well said! Another couple of points to consider along this same idea as well:

1) People don't have jobs for life any more. In reality many people change jobs every 5-10 years or even more frequently. My previous employer made you wait at least 12 months until you were allowed to join the pension scheme (although this could actually be anything up to 23 months depending on when you joined during their financial year). So even if your working life is 40 years, you'll probably lose a good 5 years'+ worth of employer pension contributions as a result of the above issue if you change employers a few times during your working life - which I bet no one factors in.

2) You can legislate against age discrimination as much as you like, in reality though it remains very difficult to find new employment if you are over 50-55. So again, if you're relying on high employer pension contributions towards the end of your working life, this is actually a massive assumption. What if you find yourself made redundant and then struggling to find new work during the last 10-15 years of your working life?

davechas

hugheskevi wrote: »

Mine is 21 tabs, although 4 of those are charts.

hehehe, clearly your spreadsheets are far superior to mine - I merely said this to point out to Atush that i'm not a financial dunce and that I have actually thought very deeply about my retirement. I don't doubt that actuaries or pensions experts (I assume you yourself are one or other of these) would have much more sophisticated models than the one I have knocked together for fun in my spare time - which is no doubt relatively crude by comparison, although I would wager that even mine is still streets ahead of any blunt online pensions calculator!

Even with your advanced financial modelling though, you must accept that you are at the mercy of market forces as much as I am; which is the key unknown which neither of us can perfectly mitigate against. Indeed, the more I calculate and budget for my retirement the more I get the feeling I would do better stuffing it all in my mattress, then taking it down the casino and sticking it all on red the day before I retire...

Annie1960

davechas wrote: »

Without being too big-headed, I have some incredibly sophisticated spreadsheets which I knocked together for fun one weekend for precisely the purpose of calculating differing savings scenarios for my retirement (online pensions calculators are frankly 'mickey mouse' by comparison, as they ignore great swathes of assumptions which are far from certain). My spreadsheet consists of approximately a dozen tabs and takes into account the difference in the value of a 2014 £ versus a 2050 £, fluctuating discount rates using historic BofE interest trends from the last 25 years, scenario calculations based on comparative stock market performance and a range of annuity rates and tax rates for drawdown timings, NPV of future cashflows based on how long I live and a range of different economic outlooks throughout my retirement, take-home pay from annuity income based on a range of fluctuating tax rates, different escalations and guarantee periods etc etc etc.

Sounds like a great weekend. Aren't spreadsheets wonderful? It used to take much longer than a weekend to do such calculations using a slide rule and abacus.


Long story short, I'm one of the geekiest accountants you could hope to come across,

I would never have guessed!

and even I cannot calculate with any certainty how much I should be saving for my retirement. Even if I could nail down a likely annuity rate range for when I retire (which I can't) - or how much drawdown per year I could get away with under current tax rules (which could change at any point before I retire) - my pension pot investment itself is still at the mercy of market forces. Say there is a market crash similar to 2008 in the few months before I retire, I could easily wave bye-bye to 40% of my investment in the blink of an eye.

But as a sensible accountant, you will not be invested in equities during the few months before you retire. About five years before you retire, you will start moving your investments over to cash funds to avoid this. Some pensions have 'life-styling' built-in and will do this for you.

Sure, I could factor in the worst case on all fronts, but I can't realistically afford to put aside 80% of my monthly income to fully mitigate all of my risks! Nor could anyone else, I imagine...

There is a rule of thumb that you should put a percentage equal to half the age at which you start your pension. So, for example, if you are 30 now, then start saving 15% of your gross salary into a pension.

..........

davechas

hugheskevi wrote: »

>Say there is a market crash similar to 2008 in the few months before I retire, I could easily wave bye-bye to 40% of my investment in the blink of an eye.

That would only happen if you had a very inappropriate asset allocation.

I just checked one of my other "fun" spreadsheets - and on 7 December 2008 my pension pot was worth 69% of what I had invested up to that date.

This doesn't preclude the fact that my pension company might well have had a very inappropriate asset allocation, but my point I think remains valid.

davechas

But as a sensible accountant, you will not be invested in equities during the few months before you retire. About five years before you retire, you will start moving your investments over to cash funds to avoid this. Some pensions have 'life-styling' built-in and will do this for you.

Nice try, but all you've done is moved the timing of the problem. And if the stock market crashes five years and three months before I retire?

I do take your point, and naturally I am invested in such a fund, whereby the risk is reduced in the final ten years gradually tapering in more cash and gilts etc as I come closer to retirement. This is not a universal panacea though is it. Say the market crashed 10 years and 1 month before my planned retirement date, I take the full hit of this crash with 100% of my investment - then the market recovers over the next few years whilst I'm moving more and more of my own funds out of it - so I only get say 30%-70% of the recovery benefit, whilst the cash investment proportion earns next to nothing! It could work out that I would have done better just leaving all of it in the stock market over the whole 10 years after the crash to recover.

atush

I agree; but it still smarts that I watch my parents and their friends even now well into the 21st Century still retiring pre-60 on DB schemes!

So join the public service and get a DB pension.

You have seriously underestimated your own LE and that of your cohort which puts your figures out of whack. My MIL was retired for 45 years. Which was longer than she was in the work force.

You also keep spouting annuity stuff, when you now know you don't have to have one. You can use Drawdown or flexible DD. Which means your money could remain invested.

It seems to me you are just trying to find excuses where you should not pay into a pension.

davechas

Sounds like a great weekend. Aren't spreadsheets wonderful? It used to take much longer than a weekend to do such calculations using a slide rule and abacus.

Spreadsheets are by far man's greatest invention. Maybe we should get together one weekend, sounds like it would be a hoot!

davechas

atush wrote: »

So join the public service and get a DB pension.

You have seriously underestimated your own LE and that of your cohort which puts your figures out of whack. My MIL was retired for 45 years. Which was longer than she was in the work force.

You also keep spouting annuity stuff, when you now know you don't have to have one. You can use Drawdown or flexible DD. Which means your money could remain invested.

It seems to me you are just trying to find excuses where you should not pay into a pension.

Atush, you seem to infer a lot about other people when you know nothing about them.

Of course I'm paying into a pension, I'm not finding excuses not to - what a peculiar impression to have of me based on what I have said!

I talk only of annuities to make my case for what atrocious value for money they are, particularly in light of the profitability level of the large pensions providers.

Drawdown would indeed be another option available to me, which as I have already said I haven't looked into much personally but I would welcome any advice you could offer - this would be rather more helpful of you rather than try to make me feel inadequate about my relative lack of knowledge in this regard