Pensions dead by 2050 – taking the Michael?

michael johnsonThe Daily Telegraph, which through Richard Evans has started writing sharp and provocative articles on pensions, came out with a corker just before Christmas. I read it on the beach and nearly choked on my sangria!

Here it is in all its glory – including some great comments. Pensions will not exist by 2050 – expert warns!

The expert is Michael Johnson who has written a number of earnest , well-argued and properly researched documents on a general theme that we would be better off with ISAs than pensions. He dislikes pensions as a libertarian (preferring people to be able to spend their savings as they please).

The counter-argument – which is the Government view, is that 25% of a pension account can be taken as cash and the rest needs to be buy a pension (unless you have more than £20,000 pa in pension already in which case you can spend the rest as you like). Pension savings doesn’t preclude short-term savings and there should be a balance – this is generally what First Actuarial say to employees when we do sessions on Financial Education

A guy called Ben Jupp wrote a pamphlet some time ago for Demos called Reasonable Force

His argument was that Government has a responsibility to make sure people have enough income throughout their later lives to keep them “off the State” and that people should be required to save to get to this level of income.

When the pamphlet was written (some 15 years ago) it cost about £100,000 to buy a pension of £10,000, now it costs about £250,000. This is because we now recognise people will be living longer and that low-inflation/interest rates are likely to be maintained. In my view, it is this increased cost of buying a lifetime income that is making pensions so unpopular (hardly the fault of pensions). Michael’s arguments play to popular dislike of the cost of pensions but they are unlikely to win favour with Government.

So long as we consider pensions as a means of insuring against living too long and dying in destitution, then it’s hard to see pensions dying out!

That doesn’t mean we have to use DC savings plans though. By 2050 we might find we are paying twice the rate of national insurance as we are doing today and getting a state pension close to the £20,000 a year that is needed to use “unrestricted drawdown” (see above).

Knowing Michael a little bit- I doubt he’d be too keen on that solution!

What do you think? Is there something fundamentally wrong with pensions that will render them extinct within 37 years? Or are the problems pensions are having down to short term considerations like markets, poor advice and rapacious insurers.

I’ve included a quick poll for you to register your opinion (anonymously unless you want to make a comment!)

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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11 Responses to Pensions dead by 2050 – taking the Michael?

  1. I suspect we’ll get a very diverse spectrum of outcomes, with quite a few people expecting to drop dead in work in their 70s.

  2. henry tapper says:

    Yes Martin

    One of the strangest behavioural traits of the middle aged Brit is their pessimism about their own longevity. It doesn’t seem we can think about ourselves actuarially!

    Maybe we undervalue our good behaviours and focus too much on bad habits!

    The message is to live long and be happy! Oh and to save like f*ck!

  3. David Crabtree says:

    I think pensions are flawed in their current form. That doesn’t mean they can’t change though, a lot appears to be changing for the better right now.

    My main problem is that the entire pension model has been based on assumptions that the last 50 years of growth and boom post Western industrialisation and recovery from several large scale wars was indicative of economic growth ad infinitum.

    It was a foolish assumption before 2008 when the markets went wobbly. It still is now. The pension system as we know it has only existed in those times. We can’t simply expect it to easily adapt to new circumstances without having to change.

    Even the finest stochastic modelling for future growth over the span of a pension is so heavily filtered with regards to the data they use that they are basically rose tinted approximations.
    Take away wars, financial crises, natural disasters.
    All these things are considered too disruptive to be able to project reliably. Unfortunate then that all these things probably do happen over the saving lifetime of the average person.

    Pensions will only make sense when they are, in essence, a special kind of personal savings account that attract benefits intended for improving the value of accounts which people intend to use for sustaining themselves in later life.
    An ISA today feels more suitable for me than a pension for future income. I’m upset that because of that choice I attract no subsidy or reward from government.

    How can we expect people to save for life beyond work when what is on offer is often no better than an ISA if it were not for the government incentives?

    I’ve not sat and done the heavy maths here, just compound interest Excel sheets running against pension modellers. There is little to make me think ‘wow, I must have a pension’… all I think about is the risks a pension might represent over the next 40 years!

    Will the salary sacrifice tax avoidance scheme be closed up and classed as evasion?

    What will future taxation levels be, might they be a 50% flat rate making the tax-free investment in pensions today seem pointless and bad value vs a taxed investment ISA today?

    Will legislation change in the future making pensions have to be taken later and later as the crisis grows?
    Will those with non-pension funds be free from having their retirement dates pushed back?

    Might we be living in a neo-communist European state where we don’t need a pension?

    I’m 32 and with 35+ years to retirement all these things are going through my mind. They are all relevant and important in my view.

    I don’t believe we will experience the same economic and social (relative) calm the last 60 years has been lucky to offer us.
    I’m being open minded about the future, and I simply want flexibility. Pensions don’t offer that. They offer uncertainty!

    Thanks

    Dave

  4. Mike Atkin says:

    Mr Johnsons statement is pretty compelling…….
    “He said that young people can see little reward in “tying funds up” for 30 or 40 years when there is a “distant and uncertain” financial return that is constantly being eroded by rising pension costs, such as management fees.” That would be a fair assessment of the mindset of most young people. To envisage that you do need a bit of empathy.
    Davids point above is well taken but misses a fundamental point…
    “My main problem is that the entire pension model has been based on assumptions that the last 50 years of growth and boom post Western industrialisation and recovery from several large scale wars was indicative of economic growth ad infinitum.”
    True but…….The mindset of a lot of the not so young is still attuned to final salary or defined benefit. A large number still think that following the standard strategy in DC will give them a DB outcome.
    With regard to Daves point about it being a neo – communist state. Could well be – its rapidly becoming like that as we speak in some ways. Globalisation will have made countries irrelevent as countries pander to global company demands for bribes and incentives in order to invest in their little countries. Look at ourPower Industry!
    I’ll be 97 in 2050 – I hope I’m still interested 🙂

  5. henry tapper says:

    Thanks Dave and Mike – you are two poles of the battery – thankfully there’s plenty of energy in the middle!

    We have to move forward with confidence- otherwise it’s notes stuffed in the mattress time!

    For those with the capacity to manage their own affairs there are ISAs, for those with limited means – pensions?

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  8. The main flaws with pensions are, arguably, that they are long-term vehicles open to short-term political meddling and that too many folk have unreasonable retirement aspirations, particularly in terms of the length of that retirement. Neither are the fault of pensions.

  9. michael porter says:

    I don’t know about pensions, but I shall be dead by 2050!

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