How your pension may be worthless and nobody is prepared to fix it

In response to an article I wrote a while ago about how old people are screwing the younger generation, I received a letter from a well-endowed pensioner. It’s not the first such missive from that most cosseted generation. The contents of the letters are usually the same.

Whether it's a four-year-old or an 84-year-old, the response to any suggestion of overindulgence is met with howls of righteous indignation. The toddler screams "it's mine"; the pensioner yells "I earned it". 
Nobody can blame pensioners for riding their luck. None of us would do differently. But they have been fabulously fortunate. Lucky is not the same thing as entitled.

Every time I write about this, my inbox always fills with genuinely disgruntled voices expressing astonishment at the suggestion that “hard-won” benefits are overly generous. And those benefits run deep and wide: it’s not just about pensions and free bus passes.

The most recent letter took a different tone. The author worked out how much he had received in pensions relative to how much he had earned while working.

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His pensionable employment lasted 28 years; he has been retired for 22 years – like many of the gilded elderly he was able to retire early.

This person now has a reasonable expectation of being retired for longer than he worked. And he has already received more in pensions than he earned in lifetime salary.

Because that pension is a “defined benefit”, there is, with certainty, much more to come. The only unknown is the date of his demise. Even then, his wife will benefit from his pension should she, as women do on average, outlive her husband.

He is in excellent health and, actuarially at least, still relatively young. So his most valuable financial asset, by a country mile, is his pension. Contrary to popular belief, his house, a fabulous asset also, comes a long way second to the pension.

These kind of pension deals, he noted, are no longer offered to his children or grandchildren. Neither is the mortgage-free house.

Pot luck

More and more people will have to take care of themselves when they leave the workforce. Occupational pensions – if they exist – are increasingly of the defined contribution variety. That is a pot of money that has to last until death.

Financial advisers – and that’s always been part of my day job – often wonder why few people engage with pension planning. The answer is straightforward: the pension business at the best of times is difficult. But it is overly and unnecessarily complicated. The jargon alone turns people off. It suits some – by no means all – to retain the complexity as a justification for employment and high fees.

That shift in financial responsibility from employers to employees means that most of us face tricky decisions when we retire.

How much do we need? How long will we live? How should I invest my pension pot? What rate of return can I expect on those investments? What happens if those expectations are not met? Is buying an annuity a good idea?

Employers stopped providing defined benefit pensions because of these questions. The only way in which certainty can be injected is via large wads of cash.

Future-proofing pensions can only be done by making sure there is plenty of financial cushion should investment returns disappoint or the retiree live to 105.

Vested interests

The simplest and best pension advice is "save more", and face up to those difficult questions. 
For many workers, particularly of the younger variety, that is impossible. Expensive housing absorbs too much disposable income. The rules, regulations and cultural environment around house-building are often set by vested interests.

These are mostly older people who don’t have much of a mortgage and are, therefore, content with high property prices. Those same vested interests benefited from a social contract that said you would be better off than your parents. A contract that offered predictable pensions, stable employment and employment rights.

Young people are not offered the same deal granted to their parents. They are merely told to get ready for the robots that will take all of their jobs. The social contract is broken. Fixing this doesn’t seem to be anyone’s political or economic priority.

Too many of us will rely on the state pension. And too many of us are unaware that that meagre sum is not something we have saved up for, but is provided solely via the kindness of strangers: younger taxpayers . There is no “pot” funding the state pension. There is no guarantee that future taxpayers will honour the pension promises we make today.

Inequality comes in many forms. Intergenerational inequality receives little attention. That’s because, like most solutions to all forms of inequality, making the rich worse off to the benefit of the poor offends vested interests.

The idea that richer, older people should be taxed more – in particular via higher taxes on property – is politically toxic. Powerful people know how to hang on to their income and wealth. Particularly pensioners.