Jonathan Guthrie
I wrote recently about an article by the FT’s Jonathan Guthrie that is packed with 10 bits of data that those of us who don’t have a pension provided us, need to understand.
Of course a lot of families will be looked after by residual DB pensions from private employment and pensions still-accruing from the public pensions, but most privately employed people would do to read the original which is here, or my blog that tries to capture Jonathan’s ten points. The blog is here.
I think this chart adds to work done by Prospect UK and most recently Alison Hatcher in Professional Pensions in pointing out that when kids arrive , women’s pensions don’t.
We hear a lot about the problems working people have when they take career breaks – at least in building up retirement income but very little about what can be done about it.
Yesterday I had tea with Andrew Young in Brighton. I have to remind myself he is not retired but “unemployed” as his linked in gravatar calls him! He spends more time thinking about pensions than most think tanks and he does so as a Dad and Grandad who has clocked up 77 years experience! Here is his solution
I had had the same concern but had not come up with the same solution. For me there should be awareness of both partners (whether married not) of pensions building up and what a woman gives up to have the children for the two of them. I said that if men can recognise the pension gap, they can share obligations and if the partnership breaks up pay compensation.
Andrew’s solution goes a stage further and suggests that in time we might have joint pensions from pooling two contributions in one arrangement. It is of course too radical to think through on a Monday morning and I’m sure there are people who can think of the ups and downs of pursuing this idea. If we are to make pensions equal to wife and husband (or partners) can’t we introduce a legal agreement to share them.
This would only work with the consent of both partners and could not be imposed upon them by law (I suppose), but if there are couples who take the pension wage cap seriously and pool income, why not pool pension entitlements in later lives. I fear we see a lot of marriages brake up before or at retirement but a legal agreement to share the pensions earned 50/50 seems to make sense.
FYI, in the states, we added something called a Spousal Individual Retirement Account way, way back in 1977, limited to $250 a year until 1997, when the dollar limit was made the same for both the worker and a spouse who wasn’t earning his/her own income.
Today, regardless of participation in an employer sponsored retirement plan, both spouses can contribute up to $7,500 a year, plus if you are age 50 or older, an additional $1,100 a year.
A worker who has been contributing the maximum starting at age 21, in 1982, will reach his/her Social Security Full Retirement Age of 67 in 2028, and if he/she earned an average of 6% per year throughout that period, the savings, combined with Social Security, would be enough to replace 90+% of final earnings for a super majority of all but the top quartile (in income) of Amerian workers (assumed a life and 15 year certain annuity, guaranteed until 82, other payout solutions might generate better results). Higher income Americans would need to save more, perhaps in an employer-sponsored plan, or in a taxable account.
So, if contributions had been made on behalf of both spouses at the maximum each year, income replacement would exceed 100% even if the earnings rate was reduced to 5% throughout the period. And, of course, if they each named the other as beneficiary, the entire amount of savings by the couple would be available to the surviving spouse.
In the states, the other benefits for surviving spouses include:
– A Social Security benefit where the surviving spouse automatically gets the better of the two Social Security benefits, and
– In many defined benefit pension plans (for vested benefits, whether for an entire working career or only 5 years), you can elect a 100% contingent annuity.
Finally, some look at the new Trump Accounts, for children under age 18 with an eye on long term investing for their children. I used a different tax preferred account to start saving for each of my children at birth, in 1984 and 1987. I call them Ben Franklin accounts – Ben taught us something about “long term” investing, by investing in Americans for a 200 year period. Contributing $1,000 each, and initially investing it in tax deferred growth mutual funds, the goal was to earn 12% tax deferred, so that the account would reach $1MM at age 60 (no additional contributions).
Both children are still on track (barely) to reach that $1MM goal in 2044 and 2047. Over the years, I have migrated those monies into Roth IRAs – so that the $1MM will be tax free (assuming Congress doesn’t change the rules). Absolutely no idea what $1MM will buy, but, it only “cost” me $1,000 each 42 and 39 years ago.
I sometimes refer to them as “Ben Franklin IRA middle class millionaires … someday”.
The new Trump Accounts, as well as Internal Revenue Code Section 529 accounts offer every child born in America today the same opportunity.
https://401kspecialistmag.com/trump-is-no-franklin-but/