The good old days

While there are exceptions, the UK, along with most of its trading partners, appears to have moved past the eye of the global economic recession storm. While most countries’ economies are now recovering, the rate of recovery is slow and not expected to speed up significantly any time soon. With historically low interest rates, both inflation and growth are unlikely to meet pre-recession rates for a decade. Experts are questioning whether bonds will ever again deliver the sort of rate they once did. Those saving into defined contribution pension schemes in the hope of providing a meaningful retirement income could, of course, decide to take more risk. By that I mean equity risk, not investing in dubious overseas investments presently on offer from some very clever pension scammers, whose glossy brochures are a tribute to the number of people who have already fallen for their patter (and who wish they had gone to Bognor). However, the only real solution (perhaps alongside more equity risk) is to pay more into your defined contribution pension scheme for longer.

The largest employers have been subject to the automatic enrolment requirements for three years this October. So far, automatic enrolment has been a success as the number of people saving for retirement has increased dramatically. The problem is they are not saving enough. There were calls at a recent conference in London run by Nest for automatic enrolment contributions to be increased to 12 per cent by 2022, which by then will not be miles away from the rate being used in Australia, which had a head start over the UK in its equivalent of auto-enrolment. It is due to hit 12 per cent under its superannuation guarantee in 2022–23. The then pensions minister, Steve Webb, thought 12 per cent on the high side, especially for someone young starting out in a new job.

However, if recognised investment returns are going to remain low, and you don’t believe the promises of those selling timeshare/property development in some overseas locations (and my advice is that if it seems too good to be true it probably is; if you want to buy a hotel, have you thought of Bognor?), then a significant increase in contributions is needed, and the Australians may indeed have hit on the correct level. One of the challenges the new pensions minister, Ros Altmann, is facing is how to substantially increase both employer and employee automatic enrolment contributions over the next five years without large numbers of those who have been automatically enrolled opting out. Not a problem in Australia, where contributions are compulsory.

Then there is the thorny question of trying to get us all to work longer, assuming of course we are healthy enough to do so. Australia has introduced plans to raise its old-age pension age to 70 by 2035. By working longer, you put away more and draw out for fewer years. For many, the dream of retiring at the same age as your parents has long since died. Further increase in our state pension age is sadly inevitable. There is a pension arrangement, of course, which could dramatically improve the situation overnight; it’s called a ‘final salary pension scheme’. If you want to know what that is, ask your Dad; it’s what he had in the good old days.

We welcome the opportunity to talk to you about your pension arrangements and how we can help. To find out more, please contact TrusteeServices@xerox.com.

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