Six pension sins: Assumptions to shatter your retirement dreams

Radical changes in the pensions sector mean that the reality of retirement in 2030 will be very different from the present day – and unrecognisable, compared to the relatively generous pensions climate of past decades. 

However, with over half the nation not saving towards a pension at all (source: Halifax), most people seem unaware that the traditional streams of retirement income are dwindling. 

It is a full-time job to keep up with the evolution of the pensions scene, with separate developments in the state, public and private sectors coalescing to form the complete picture. 

It is therefore understandable that employees are often unaware of the gradual erosion of their (likely) retirement income from state and employer – and fail to see the urgency of arranging a personal pension, to support a comfortable lifestyle at the end of their working life. 

The Six Sins

 There are six assumptions about retirement planning which are potentially disastrous for pensions savers. These assumptions are based on the realities of previous generations – realities that are now gone forever. 

1 We will have a substantial basic State Pension, as our parents did 

2 We will also have a substantial company pension, as our parents did 

3 There will be strong government support for pensions saving, as our parents had 

4 The size of our retirement fund can be modelled on what our parents did 

5 We can think of our house as part of our retirement planning 

6 The government Personal Accounts scheme is coming 

Each of these six assumptions contains a flaw. Taken together, they demonstrate the need for vigorous and sustained saving into a personal pension plan – which, with 20% government tax relief, is still an unbeatable option. 

The Six Fatal Flaws 

1 ‘Substantial State Pension’: The basic State Pension is now far from ‘substantial’. It has been losing value since it was liked to the Retail Price Index in 1979. It currently stands at under £5,000 per year, and pays out no more than £95.25 per week – and less, if you do not qualify for the full amount. 

2 Substantial company pension? Many private sector employers are shutting down the ‘defined benefit’ pensions our parents enjoyed – household names such as Amex, Pirelli, Costain and Barclays. Defined benefit pension schemes guaranteed a predictable income related to final salary and years of service. These companies are now shifting to less predictable ‘defined contribution’ schemes instead. With a defined contribution pension, your return depends on how well your pension fund was invested, with no guarantee of what you’ll get. In other words, the risk of the investment has been shifted from the company to the employee. 

3 Government support for pensions? The huge explosion in birth rates from 1945 into the 1960s (the ‘baby boom’) has now itself given birth to ‘the Pig in the Python’. This image, of a long python with a large bulge in the middle, depicts all the baby boomers coming along who will be arriving on the retirement scene over the next 20 or 30 years (also known as the ‘demographic timebomb’). Government will be under financial pressures that will make our current ‘financial crisis’ seem like a damp squib – who knows what the future holds for the state pension then. 

4 Size of retirement fund: pensions provision for current and future generations will have to be greater than it was for our parents, because we are living much longer. People are no longer looking ‘old’ at 60 – in fact, we are expected to live into our late 80s. This means we need much bigger pension pots to fund retirements of 20 years and more. 

5 Think of our home as part of our retirement planning: even if you are prepared to sell your cherished home and downscale, the belief in the solid value of property is a legacy of the 1980s boom, and no longer holds water. Average house values have tumbled to £158,000 from £200,000 in this decade alone, according to Halifax. 

6 The Government Personal Accounts Scheme (PAS) will provide: the soon-to-launch Personal Accounts Scheme will give workers a standard pension based on an employer contribution of 3% of gross salary, an employee contribution of 4%, plus 1% in tax relief from government. This is precious little, and for anyone over 40, will have precious little time to grow. To provide context, compare this to the enlightened Swedes, where the basic contributions for their personal accounts scheme start at 16%. 

The conclusion? Starting a personal pension, and saving hard to grow it, is no longer optional – it is essential!