The Death of Retirement

mgdavid

bigadaj wrote: »

Apparently youngsters can't spell fj?

can't copy either ;-)

I know, I know, it was done on a (notso) smartphone....

kidmugsy

Deferring gratification and instead saving for a pension requires that you think your country has a future. Has it?

chucknorris

greenglide wrote: »

and there will be plenty of people who suddenly wake up (whether they smell the coffee or not) and realise that the state pension will not be enough to live on (interest only mortgages and other things) and have little choice but to keep on working.

That's what happens when you don't plan.

bigfreddiel

And I forgot to add as well as high interest rates, what about pay. As a gradual engineer in the aerospace industry in 1975. I earned £200/month.

So try saving, buying a car, buying a house, and all the other expenses. Not much left st the end of the month, if anything. New car? Forget that one. My second hand MG Midget cost £1,000 half a years wages!

Beer was cheap luckily 10p per pint!

Cheers fj

RickyB2000

But didn't high interest rates mean high wage inflation and rapid debt reduction? I remember my parents saying that in the early 80s you bought the most expensive house you could. Sure, you were eating bread and water for a few years then suddenly your pay far outstripped your morgatage payments and the debt became a tiny amount (relative to income).

Today, it is the opposite. Low interest rates and low wage inflation. Which means that huge debt you have to take out follows you around, constantly hitting you hard in the wallet year after year. The only reason it is manageable is the fact it costs little to service (but people just borrow more to pay for high priced property)

LHW99

But our available mortgage offers were rigidly fixed to 3 times main salary + half the spouse's.
And I do remember our first house with the hole in the front window, no hinges on the back window, one open fire, and the only furniture being 2 folding chairs and a mattress.
And it was still as much as we could afford.

bigfreddiel

bigadaj wrote: »

Apparently youngsters can't spell fj?

Yeah,yeah, bl@@dy touchpads! fj

RickyB2000

LHW99 wrote: »

But our available mortgage offers were rigidly fixed to 3 times main salary + half the spouse's.
And I do remember our first house with the hole in the front window, no hinges on the back window, one open fire, and the only furniture being 2 folding chairs and a mattress.
And it was still as much as we could afford.

There is an argument that fixing borrowing actually helped keep prices down. Don't get me wrong, high interest rates would mean buying as much house as you could afford might not be much house. And it would be hard while waiting for inflation to destroy the balance (and some people would lose). But after some time disposable income above morgatage payments (as a percentage of income) would get bigger and bigger. Today, you get a massive morgatage - often for not much house in the SE or London either - and the percentage of your income to spend/save remains fairly static year after year.

Of course, I didn't live through the high interest rate times, so I can't really talk.

jamesd

Minimum age from 6 April 2016 is to be £6.70. That's £13,936 before tax and NI, £12,563 after, before pension contributions. State pension is to be around £8,092 which is a 64% replacement rate, just short of the 66% gold standard. Once you deduct money for the pension contributions while working and add it to the income when retired the net replacement rate may exceed 100% of net pay. More than a million people in the UK are on the minimum wage, though the people who are on it tends to change over their working lives.

For those on higher incomes the paper assumes that they are crazy and blow half of their potential income on an annuity instead of starting out with state pension deferral and drawdown until annuities provide good value for money later in life. Natural enough that a firm selling annuities would assume that people want their product even though the evidence is that people usually don't, as has been seen in the massive drop in sales since last April. They are better than most, though, they at least mention the option of deferring in their paper.

They also use pessimistic growth assumptions: 5% nominal growth per ear when the UK stock market has achieved 5% plus inflation growth on average for the last hundred years, 0.75% charges, buying an annuity instead of buying more state pension for at least five years of deferral.

So what happens if you don't use pessimistic assumptions but instead use those that have been obtained? Lets work through their average income case, which they gave as £27,600 a year with 6.3% of pay going into a pension, £1,742, which is based on the 8%. Of that 5/8ths comes from the employee so their annual gross pension contribution will be £1,088.75. Net pay at that level while working is £20,984.20.

Next, stop, a regular savings calculator to see what the pension pot size might be. £145.17 a month for the 46 years between age 22 and age 68, which I assume will be state pension age. Growth at real 4.25% after their assumed 0.75% charges. Gives a pot size of £287,982.

First thing to do with that pot is to defer the state pension for five years, costs £40,000 and increases the state pension by £2,320 a year to £10,320. Assuming no tax on that it's at 49% replacement rate already.

To get to 50% replacement rate requires negligible income from the remaining pot. 66% of the working net income is £13,849.57 to the extra needed is £3,529.57 from a remaining pot of £247,982. That's a yield of 1.42% before allowing for 25% of the total pot being a tax free lump sum that can generate tax free income.

In conclusion, their pessimistic results for both low and average age employees come as a result of them making unduly pessimistic growth assumptions and choosing poor ways to increase pension income in retirement. Make more sensible assumptions and both the low pay and average pay workers can retire just as happens today, a few years before state pension age.

Life's harder for those on high pay who actually do need to pay in more to get to 66% replacement rate but it's also known that the higher replacement rates aren't required at higher income levels, so the target itself doesn't actually make sense then.

Move along, there's no real story here, just the usual pension provider or annuity provider trying to get more money spent on their products.

redux

Triumph13 wrote: »

The one valid point is that in the past many people could sleepwalk into a comfortable retirement simply by joining their company pension scheme with the 'standard' contributions.

I'm not so sure about that. Or certainly not all firms.

In 1986 I left a job in that I'd been at for just over 11 months. The man in accounts decided the simplest thing to do was refund my pension contributions. After he'd made extra NI contributions for contracting me back in I got a cheque for £95, about 1.3% of salary.