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DIY pensions: why you can't rely on the state

PUBLISHED: 09:52 09 August 2019 | UPDATED: 09:52 09 August 2019

You're better off sorting your own pension out rather than rely on the government, says Peter Sharkey. Picture: Getty Images

You're better off sorting your own pension out rather than rely on the government, says Peter Sharkey. Picture: Getty Images

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Want to gain greater control? Making your own pension provision could be the answer, says financial expert Peter Sharkey.

The World Economic Forum (WEF) doesn't hold back when it comes to publishing statistics and forecasts on just about every topic under the sun.

Indeed, the frequency with which WEF reports are issued, coupled with their often dizzying length, probably ensures that few are read cover-to-cover. Nevertheless, one of its recent publications, We'll Live to 100 - How Can We Afford It? proved unusually popular. Perhaps it was the snappy title.

In truth, this was a comparatively brief document which posed two questions many of us ask ourselves with increased frequency once we arrive in our late forties and early fifties. 'At what age are you planning to retire?' and 'do you have enough saved up to do so?'

Who would have thought that 17 short words could pose such a conundrum for the middle-aged?

It is that greatest unknown, life expectancy, which explains the reaction of most grey-haired folks to those WEF questions, because accurately predicting our lifespan (and saving enough to afford it) is at the very heart of the conundrum.

Since the end of the Second World War, life expectancy has risen, on average, by between two and three years every decade. Remarkably, around 25pc of today's newborns can expect to live until at least 2109.

The WEF paper notes that: "While increased longevity is a positive step for individual... [it] has a profound impact on the traditional make-up of our societies and the social protection systems that are designed to support us in our old age."

The report adds: "One obvious implication of living longer is that we are going to have to spend longer working. The expectation that retirement will start early-to mid-60s is likely to be a thing of the past, or a privilege of the very wealthy."

The italics are mine; the implications for people currently starting to ask themselves when they'll retire are potentially life-changing.

It's a situation exacerbated by what is known as the dependency ratio, ie the ratio of people in gainful employment to those in retirement. This is expected to plummet from the current 7:1 level to 3:1 by 2050. This radical shift in society's age make-up virtually guarantees rises in retirement ages well beyond even the gloomiest predictions.

Moreover, this combination of improved longevity and a falling dependency ratio ensures that, according to the WEF, "...policy-makers must immediately consider how to foster a functioning labour market for older workers to extend working careers as much as possible."

It would appear that not only is time of the essence, but there isn't much scope for our politicians to get things wrong.

Although the UK has operated a successful workplace pension scheme for more than seven years, no-one could argue that it has solved the "problem" of enhanced life expectancy.

By October 2020, for example, the state pension age will increase (to 66) for men and women. The government also plans further increases (to 67 before 2028) and there's little indication that the official pension age will remain unchanged into the 2030s.

Across the globe, as people are living longer, they're drawing state pensions for more years than systems were designed to handle.

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Data published by the World Bank shows that retirees in the half a dozen nations with the largest pension schemes (US, UK, Japan, Netherlands, Canada and Australia) are living between eight and 11 years longer - and a massive 16 years longer in Japan.

The WEF describe this situation as a 'global timebomb', the cost of which is "imperilling the incomes of future generations and setting the industrialised world up for the biggest pension crisis in history".

The anticipated increase in longevity and resulting ageing population is a modern-day 'problem' with which economists across the world have grappled for more than three decades. To date, no-one has come up with an answer capable of solving it.

There are measures we can predict: higher taxes, longer working lives, progressive increases in the retirement age, means-tested state pensions and so on. Ultimately, however, if retiring at some point between, say, 65 and 70 is an attractive proposition, do NOT rely upon the state to fund your retirement. Instead, individuals must address matters by making their own pension provision. The sooner they do, the greater control they will have over their lives.

TAM Asset Management Ltd offer savers the opportunity to save for their retirement in a variety of Investment ISA portfolios. For further details, please visit the MoneyMapp website.

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For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.

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