Under 45? You’ve almost no chance of getting a state pension
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It's time we talked about the facts of life, says Peter Sharkey
Even contemplating broaching that most sensitive of inter-generational subjects, the facts of life, is enough to induce equal levels of discomfort among those charged with explaining them and the intended recipients.
Of course, the degree of awkwardness depends upon which FOL are being explained. Most, ie those dealing with life's harsh realities, are usually administered retrospectively, following some mishap when younger folks are reminded to be on their guard.
Then there's that conversation, when an older, wiser family member explains, in broad terms, a process the audience already knows about in detail, though I'm not convinced this conversation still takes place as frequently as it used to. Indeed, more recently, there's probably been more demand for the financial facts of life than for the FOL discussion focusing on what was once charmingly referred to as the 'birds and bees'.
Financial FOL are as important to your future as any stilted explanation of human reproduction. Here's one: if you're under 45, there's almost no chance of you receiving a state pension when you 'retire'.
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Forget about tottering along to the Post Office every Thursday where, with dozens of other grey-haired folks, you might mingle and engage in a natter before becoming the beneficiary of taxpayers' largesse for another week. It's not going to happen.
Moreover, while our fictitious 45-year-old might fancy 'retiring' at, say, 70, the probability is the state pension won't become payable until she's closer to 80, and even then (assuming it's still distributed at all) it'll be means tested, with perhaps just 10% of people receiving the benefit in full.
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If you're aged 25-35, the news is even bleaker. In fact, it's so bad, the sensible thing would be to discount receiving any state pension at all. Make your own provision as soon as possible (go online and read my earlier columns for details) and you'll thank me for it in four or five decades. Last week a friend asked me to read the draft of a book he's written, the aim of which is to encourage a younger cohort to consider the harsh financial FOL. Central to the book are life expectancy statistics. Life expectancy has risen beyond the wildest dreams of adults living a century ago. In 1901, the average British male could expect to live to 45; by 2012, that figure was 79 and it continues to rise.
An unprecedented period of economic growth accounts for the remarkable rise. Our living standards have improved, as has our food, housing, wellbeing and environment, while medical advances and improved techniques in hospitals ensure that diseases once responsible for the deaths of huge numbers of people have either been cured or have become treatable.
The result is a healthier older population: one where '60 is the new 30'; where the 'independent grey traveller' is, by some distance, the travel industry's fastest-growing sector. And these guys hang around for much longer than anyone laying the foundations for Britain's (or anywhere else's) universal state pension system could have possibly expected.
In 1976, the UK's population was 56.2m. Fewer than 8m (14.2%) were aged over 65. By last year, the population had soared to 65.6m, almost a fifth of whom were of pensionable age. The Office for National Statistics forecasts that by 2046 the UK population will have risen to 76.3m and almost a quarter (24.7%) will be aged over 65.
Meanwhile, the number of people deemed to be of working age (16-64) will fall, from last year's 63m to 58m in 30 years. The number of working people paying taxes will plummet as those wishing to benefit from those taxes in the form of a state pension will increase, at 230,000 a year until 2046. Which brings us to another, very important, financial FOL: do not expect 'National Insurance Contributions' to gallop to the rescue. NIC is an income tax. The money paid in NIC does not go into some specially-created investment fund from which pensions are distributed. It's a tax and the sooner the government of the day admits this, the better; although don't hold your breath, because it would mean admitting basic rate income tax is actually 32%, not 20%.
There is a way to solve this 'pension crisis', but it's down to individuals, not the Government: primarily by saving more. The most important financial FOL of all.
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Peter Sharkey read economics at the University of Bristol. He worked as an accountant on three continents and has been a company director and investor for more than 30 years, building and selling three different companies.