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Pensions are falling unless you do something about it

People retiring today have to get by on half the income of those who retired 15 years ago. Saving more and for longer is the only answer.

Pensions are falling unless you do something about it

Workers retiring today are receiving half the income of those who retired 15 years ago as and the problem is only going to get worse.

The Organisation for Economic Co-operation and Development (OECD) has issued a stark warning about the future of pensions, as it said someone who saves 10% of their wages over a 40-year working life will only receive half the retirement income of someone who retired in 2000.

It has based its figures on a person using their pension pot at retirement to buy an annuity, which pays out a guaranteed income for life, but whose rates have been hit by interest rates and government bond yields falling to record lows.

Catherine Mann, chief economist at the OECD, said: ‘We’ve had more than half a decade of very low interest rates and that means for someone who has been putting money into a pension fund, the value of their lifetime retirement is about half the value of someone who retired in 2000’

The situation is only set to worsen for middle-aged workers who will not see the benefit of generous 'defined benefit' (DB) or 'final salary' pension schemes enjoyed by previous generations. They are also too late for the government's pension auto-enrolment programme to help them with the financial implications of people living longer on average.

Generation gap

Kate Smith, a pension expert at Aegon, a pension provider, said it could take a generation before retirement incomes climbed again.

She said annuity rates ‘have worsened over 15 years and were in decline before that anyway’. Older retirees were using the income from 'defined contribution' (DC) or 'money purchase' schemes - where the pension is linked to how much has been saved and how far it has grown - to ‘top up’ their guaranteed income from final salary schemes, she said. However, the number of people living off both types of schemes was declining.

‘People are not saving enough and the world has changes, and the majority of people will be in DC [schemes] going forward,’ she said. ‘There will be no DB in 20 years [in the private sector]…so people really need to be aware that they need to save early, and [save] more, and just keep going.’

Smith warned that auto-enrolling millions of workers with no pension saving into an employer scheme had been a good start but contribution levels were not high enough to have sufficiently big pension pots from which to derive an adequate income in future.

‘Auto-enrolment is a trigger to get people to save but contribution rates are not high enough,’ she said. ‘There will be a decline in retirement saving as DB [savings] whittle down and it takes a long time to build up a decent DC [pension]. Hopefully we will see a steady increase [in retirement income] but it will take a generation.’

'Get out of jail'

Tom McPhail, head of retirement policy at Hargreaves Lansdown, an investment and annuity broker, agreed the ‘situation will get worse before it gets better’ and warned those in their late 40s and 50s could find themselves underfunded.

‘The challenge is the cohort in their 40s and 50s,’ he said. ‘Keep on working is part of the answer but there are questions about what we can do to facilitate later life working and retraining.

‘If you arrive in your 60s and you have not saved enough, if you’re lucky you will be able to carry on working…the worse outcome is you have not saved enough and you are not in a position to continue working and will live on a very low income or depending on welfare, or both.’

McPhail said one avenue those in their 40s and 50s have to fund retirement is their home, which they will be able to release equity from.

‘Many will have the safety valve of equity release,’ he said. ‘Those hitting retirement do own property…That will get people out of jail.’

While auto-enrolment is expected to help those in their 20s and 30s avoid the same retirement fate facing those in their 40s and 50s who will retire underfunded, it should not be assumed that pension incomes will rise again.

Work longer

Former pensions minister Steve Webb, who now works for Royal London, a pension provider, said the OECD report confirmed that people should be prepared to work longer in line with rising longevity.

‘The consequence of what [the OECD] is saying is that people will have to work for longer,’ he said. ‘If you think you can buy an annuity at age 65 and it will pay out for longer and that you will get the same amount [of income], it won’t.’

He said he would be ‘very surprised’ if young people in their 20s and 30s do not have a state retirement age of at least 70 and they would need to save more in order to enjoy a decent level of income.

‘DC pensions will grow slowly unless we get to 8% [contribution rates],’ he said. ‘People will have to work longer and get serious about saving into their DC pension.’

10 comments so far. Why not have your say?


Jun 07, 2016 at 17:54

Many kid's will have the benefit of being able to inherit a substantial residue of pension from their parents if the latter have had the foresight (and of course the worth) to go into drawdown. This can compliment or form the basis of their own pension planning (or of course, can be blown on wild living, if the parents "pop their clogs", too early!!). For many kid's there will be no drawdown legacy however, and the future for them could be grim indeed. As usual it is in the lottery of life and depends on a combination of who begets you, and your own self determination to succeed and plan. Whether this is a fair way for a country to run it's pension system is a whole new debate however.

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Jun 07, 2016 at 18:04

I would like to see annuity providers come under the same rewards scheme as IFAs. If they simply charged a fee for their annual service and returned any undistributed remnants of annuitants' pension pots, it would be a much fairer, clearer system

As it is, we've no idea what they are doing. They simply say, "We'll give you this much, now go away and die and don't forget to tell us when you have so we can take whatever money is left."

They should also be free to invest annuity purchases however they see fit while being compelled to retain sufficient capital to guarantee their payouts regardless of how their investment strategy performs.

The current system is just unashamed theft.

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Law Man

Jun 07, 2016 at 18:13

Given the above, there should be incentives, or even compulsion, to save into a pension scheme, from a young age.

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Jun 08, 2016 at 06:51

These arguments from professionals in the pension and investment industry, that they should be given more of your money to handle at substantial profit to themselves, should be treated with a pinch of salt. As for retirement age, who is going to employ 70 year olds, Mr.Webb? Longevity is one thing, health another, and the nation's health service is going downhill....

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Jun 08, 2016 at 08:26

Briesmith - the "undistributed remnants" of the funds of people who die "early" are used to fund the pensions of those who die "late". This is the whole point of annuities. So actuarially there is no refund pot.

The main thing is to educate the young to save more. This may not necessarily be in a pension fund. We are building more and more shiny shopping centres which are filled by the younger generation, many of whom must have the latest fashions and designer labels. Celebs and social media fuel the frenzy to look cool. Unfortunately far too many are taken in by this frivolous approach to life and put saving right at the back of their priorities. If they have a credit card in their pocket and are fooled into thinking that many "sales" are real they have no hope for the future.

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Jun 08, 2016 at 09:22

Jon, please get out of the house more. Most young people are too crushed by student debt, saving for a housing deposit, and high rents. Not designer fashion and iphones, I think you're thinking about Chinese tourists.

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Jun 08, 2016 at 09:35


Annuity purchasers aren't buying a pension like in defined benefit schemes. In these schemes what you say is true, the ones that die early help to pay the pensions of those that don't.

In personal pensions (the clue is in the name) and in the purchase of annuities there is no element of "common purpose" amongst contributors or annuitants. Each one stands alone, each and every one of us has his/her own fund.

As you pay into a pension you will receive annual projections from the pension provider based on poor, average and good performance of the fund. Looking back these have been roughly, 3%, 5% and 7%.

I read that annuity providers - they are different departments in the same companies of course - are offering 4% to a 60 year old. This rate of payout is clearly less than their colleagues across the office are offering to grow pension plan owners' funds in an average year. They are, basically paying your annuity out of your annuity fund's income leaving them to take the pot at your death when it is almost certain to be larger than it was when the annuity payment plan started.

It is a scam, a joint enterprise in thievery between the government, who want to sell their GILTS as cheaply as possible, (annuity providers have to invest in GILTS) and the insurance companies who have decided their officers, particularly the very senior ones, and their shareholders (which include those senior people) are entitled to lifestyles their pension plan contributors and annuitants could only dream of.

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Jun 08, 2016 at 10:05

Briesmith - once a personal pension is converted into an annuity, it goes into a common annuity fund. It is no longer personal.

The annual projection rates are determined by the FSA - not the pension funds. I understand that the FSA are to cut these rates very belatedly, based on the changing yields of the markets.

Thus the projected rates have NOTHING to do with actual returns. And they refer to the pension funds, not the annuities.

A large proportion, if not all, of annuities are invested in gilts and the like to mitigate any risk of the annuities going bust, and therefore the returns under current market conditions are even lower. There is no "taking of the pot" as the providers charge a management fee and any surplu or deficit in the fund goes forward and affects future quotes. However, as the result of the financial crisis and EU legislation, these funds are now required to have built up larger reserves as insurance against another crisis.

I trust that this answers your points apart from the last one.

I agree that gilt rates are artificially low, which also helps our Government manage the growing and colossal national debt. However, inflation rates have also been low up to now, but given the levels of quantative easing this is unlikely to stay that way in the medium term.

I also agree that many top executives in pension and annuity companies are paid far more than their skills deserve. This also means that they are loathe to criticize excessive pay in the companies in which they have large shareholdings, as they are also in the club of executive pay review bodies.

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Jun 12, 2016 at 12:49

"(OECD) has issued a stark warning about the future of pensions"

What took them so long? Many of us commented about this 10 years ago.

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Jun 12, 2016 at 12:56

"...inflation rates have also been low up to now, but given the levels of quantative easing this is unlikely to stay that way in the medium term."

I agree. Look at the NS&I rates on rolled-over index-linked National Savings Certificates: RPI + 0.01% I think, and the fact that new index-linked NSCs are not available to purchase. It seems to me that NS&I are anticipating inflation.

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