The Death of Retirement

RickyB2000

jamesd wrote: »

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.

Isn't the reason for DB schemes closing down due to low growth? Companies are taking the 'pessimistic' view. Indeed, all pension statements I have received use a very pesamistic measure so I am not surprised people are panicking. This means two things (in the long term):

1) they are wrong, this is a 'blip' and growth will return to pre crash levels (on average). In which case our DC pensions will overflow with money and nothing to really worry about (I know DB pensions were very generous to late joiners or high earners that DC schemes will still struggle to match with great growth, so people still need to plan)

2) they are right, growth is going to be flat for the long term (it may go up and down, but generally flat). In which case we should be worried about ever getting a decent pension.

uk1

jamesd wrote: »

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.

I think the real story is the subliminal effects of several converging trends. Because of this I think "retirement" as we know it is dead.

Firstly many of those starting out today can still see some people - not many ... but some ... collecting from the last of the DB programmes and might presume that although they will not get as much, however if the put in a few hundred quid a month in from thirty they'll be "OK".

I did a very rough calculation about one of my pensions. I worked for a corporation and paid in around 16% of my earnings over the 17 years into it's DB and AVC (which was converted into extra income from the DB) which I doubt was much more than £50k after tax over those years. I started taking that pension at around 51 or so at around £18k. At 65 it is around £25k a year and will shortly stop being increased although it will provide a 50% widow's pension hopefully never taken . How much did my roughly £50k buy? Might it be somewhere between £700k to a £1m pot? People do not realise how much they would need to replicate this type of pension pot.

I think also that the "instant gratifacation" aspect of today's behaviour mitigates against doin long-term things. We thought we had a live for today attitude but it is nothing compared to the current younger generation. Forward planning does not exist.

Finally we have seen the growth of the "entitlement" society. Whatever else the baby boomers presumed they would need to look after themselves. Now I think it is more a benefits society ie "they will have to look after me if I have no cash for food and home etc.) ...

So I think the combination of presumption that "everything will be OK" and the removal of the "planning for the future" gene means that retirement as we know it is dead but no one is really saying.

Jeff

Chickereeeee

One of the major changes in society over recent decades (and one of the main reasons house prices have gone up) is that married women are now mostly full-time workers. This has meant there are two salaries to service a mortgage (so can afford bigger mortgage, so prices go up) but will also mean there will be two pensions, per couple.

Used to be, not long ago, that the male partner had to save enough pension for two.

This is a side effect of 'womens right to choose' (which I fully support): working becomes almost compulsory.

C

uk1

Chickereeeee wrote: »

One of the major changes in society over recent decades (and one of the main reasons house prices have gone up) is that married women are now mostly full-time workers. This has meant there are two salaries to service a mortgage (so can afford bigger mortgage, so prices go up) but will also mean there will be two pensions, per couple.

Used to be, not long ago, that the male partner had to save enough pension for two.

This is a side effect of 'womens right to choose' (which I fully support): working becomes almost compulsory.

C

Didn't that trend start with the baby boomers rather than now? The last generation I recall that mum stayed at home would have been mum's in the 50's rather than late 60's onwards.

Jeff

Alter_ego

woolly_wombat wrote: »

Politicians ignore millenials at their peril.

Oh no, you don't mean they're going to start voting?

jamesd

RickyB2000 wrote: »

Isn't the reason for DB schemes closing down due to low growth? Companies are taking the 'pessimistic' view. Indeed, all pension statements I have received use a very pesamistic measure

Depends on the time span being considered. The quotes if not defined benefit will be due to the FCA telling providers to use pessimistic growth assumptions in forecasts that they know are below long term results.

For defined benefit schemes a significant part of the problem is accounting rules that were changed quite a few years back. Those require current pension deficit projections to be reported in the company accounts. If the company does well but inters rates drop, the pension deficit rises so the boss loses their bonus due to poor results even though the results are nothing to do with what the boss did. It's added variation in results that doesn't match company performance so it pays to get rid of it by closing the defined benefit pension schemes. But only in the private sector because that's the only place subject to these issues. So we've seen them mostly vanish in the private sector but linger in the public sector.

Paul_Herring

RickyB2000 wrote: »

Isn't the reason for DB schemes closing down due to low growth? .

Not the only reason. Increased life expectancy and regulatory burdens (e.g. forcing the funds to use gilts rather than equity) are others.

kidmugsy

jamesd wrote: »

If the company does well but inters rates drop, the pension deficit rises so the boss loses their bonus due to poor results even though the results are nothing to do with what the boss did.

It's the old problem, then, that companies are run in the interests of the bosses not of the shareholders. Throughout my life I have never seen the company-hating side of politics put forward any intelligent suggestion for reform of corporate governance. Instead they repeat nineteenth century non-solutions to non-problems.

Malthusian

Chickereeeee wrote: »

One of the major changes in society over recent decades (and one of the main reasons house prices have gone up) is that married women are now mostly full-time workers. This has meant there are two salaries to service a mortgage (so can afford bigger mortgage, so prices go up) but will also mean there will be two pensions, per couple.

Used to be, not long ago, that the male partner had to save enough pension for two.

This is a side effect of 'womens right to choose' (which I fully support): working becomes almost compulsory.

It's not at all compulsory. It's because expectations have been raised. People now expect the kind of house and luxuries which require a dual income to pay for.

You are still perfectly free to have one income and one housewife/husband as long as you don't expect the same size house / number of kids / Sky TV / broadband speed / holidays abroad etc etc etc as a family where both parents choose to work.

saver861

Malthusian wrote: »

It's not at all compulsory. It's because expectations have been raised. People now expect the kind of house and luxuries which require a dual income to pay for.

Its all about image today .... much more so than the past .... and image is costly!

Even with two incomes it still does not suffice for many ....