STRAIGHT TALK ON THE DOSH
Phil D. Coffers
The Islander Economics
Correspondent
Act in Haste,
Repent at leisure
Rules governing UK
private pensions change
fundamentally in April 2015,
designed to reflect changes
in the characteristics of
a working life in the 21st
century. The emphasis will be
on personal responsibility, and
it may leave some coming up
a little short.
The headline change is that
now, from age 55 you can take
your entire accrued personal
pension as a lump sum, and
then, minus a bit of tax, spend
it on whatever you like. In
theory, you are supposed
to sensibly choose between
financial products designed
to provide for you until your
demise. But you can blow it
on a cruise, build yourself a
conservatory, or as pensions
Minister Steve Webb said, he
wouldn’t mind if you blew
it on a Lamborghini. Change
was certainly needed as the
current set up was designed
in a different era, around
different expectations, and a
different set of figures.
In the first half of the 20th
century, generally you left
school at 16, got a job. And
often kept it until you were
65, paying your stamp every
month and then the state
would keep you modestly for
a few years until you expired
at 70. It worked. After the
Second World War, an older
generation, thinned out
by conflict with lower life
expectancies were supported
by a baby boom living and
working as the country, in
the main, prospered. Today
however, those baby boomers
are retiring and can expect on
average to make it to 85. 30
years of retirement to plan
for and pay for, not easy, but
many have healthy pension
plans in place, and in many
cases have benefitted from
the boom of home ownership
in the 70’s and 80’s. The
generation of their children
however will not have it quite
so easy.The chances are that the child
of the baby boomer didn’t
start meaningful properlypaid work until their early
20’s after full time education.
The chances are that they
will have many years of
student loans to pay back. If
they were lucky or prudent
enough to invest in property
they didn’t do so until their
mid-30’s or early 40’s on 25
or 30 year mortgages and
then at multiples of their
incomes that a bank manager
of the 60’s or 70’s would
have shuddered at. While
for many more, the prospect
of home ownership is a pipe
dream that becomes yet
more unlikely with every
passing year that will leave
them at the mercy of rising
rents until their dying day.
The chances are that they
had children on average 5
years older than their parents,
and that those children are
likely to stick around at home
for longer, and then need
greater parental support
through further education
than their parents. This is also
the generation that grew up
when higher purchase, credit
cards and easy, and seemingly
unlimited personal credit was
there for the taking...but not
always for the paying it back.
In other words, a generation
that may not exactly make
shrewd pension choices when
offered a lump of cash at
the time junior is heading to
university, or decades of debt
sit piled up around them.38% of UK adults have no
pension provision whatsoever,
on average those that do
are saving far too little. The
average pot is estimated at
£36,800, whereas at currentrates to secure a modest
income until death your pot
should be £240,000. This at a
time when the proportion of
people over 65 will increase
from 17% to 24% over the
next 50 years.The problems of delegating
responsibility from the
pensions industry to the
individual include, fueling a
house price boom as many
will opt to become buy to let
landlords. There is anticipated
to be an increase in fraud
as those with questionable
morals set up dodgy schemes
to hoover up the billions
of pounds of pension pots
burning a hole in the pockets
of many financially naive
pensioners, and the very
real risk that if you make the
wrong decisions, you may
very well run out of money
before you run out of life,
inevitably leaving the state
to pick up the pieces. Taking
control of your finances in
life is the right thing to do,
and undoubtedly the way the
world is heading, but it is vital
that education and support
are available as a poor
decision could have dire and
long lasting implications for
the state and the individual
alike....or you could just buy a
Lamborghini and hope for the
best. The choice is yours.