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Pensions dead by 2050 – taking the Michael?

henry tapper

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!)

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