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Focus on the future

Last week, I took part in Scottish Life head of pensions strategy Steve Bee’s podcast. The focus of our talk was pensions and what damage was being done, with the focus on pension savings always falling on the contributions.

Personal accounts have fallen into the same trap – no matter at what age you start a personal account, it is true that on the percentages stipulated today you will not receive an adequate income.

Many years ago, when I worked for a major insurer, my manager remarked that it was interesting that people sought pensions with such odd numbers, for example, £5,134.98.

He was, of course, being sarcastic, as his point was why do people buy and why are they sold pensions for round sums such as £100 a month when surely they are looking at it the wrong way round? Put another way, the seller was not arranging a pension but flogging a con-tribution. This is at the root of our savings culture or rather lack of it.

It is not restricted to the retail distribution part of our industry, as the benefit consultants have a lot to answer for as they replace defined-benefit schemes with employer contribution of 14 per cent plus with schemes in defined-contribution format where the employer contribution rarely hits double figures.

The trouble is that far too few people realise the cost of retirement and some may be sleepwalking towards never being able to retire at all.

This lack of financial literacy needs to be handled in a far less politically correct way. We need to make people realise just how long they will live.

Some years ago, we ran a survey with the then Society of Financial Advisers’ members, asking people how long they thought they would live for. The results showed that, without exception, people grossly underestimated the length of time that they would live after retirement.

There is also the danger that far too many people rely on an inheritance to bail them out from a lack of planning in the pension department.

You only have to look at the cost of long-term care to recognise that this is a dangerous mistake to make. I remember having an investment enquiry where the grandparents’ house had been sold and the children sought to invest it to cover the nursing home fees. They asked me what the investment would be worth on their father’s death.

I suggested that it would be exhausted long before he was dead and they should plan to pay the fees themselves. This was not the answer they wanted and went elsewhere.

In a perfect world, they would have returned, acknowledging that everyone else gave the same stark warning but they did not and the same thing applies to pensions if we fail to stress the inadequacy of people’s savings. I have long said to clients that how they save for retirement is not important, it is how much they save that matters. The lack of focus on matters of the future is a facet of a society where all that matters is immediate.

Robert Reid is principal of Syndaxi Financial Planning

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