BACK in the 1990s, the French government began extraditing suspected Basque terrorists to stand trial for crimes allegedly committed in Spain. It was a highly unpopular move. One witty EU politician said France’s big mistake was ‘putting all their Basques in one exit.’
This was, of course a play on ‘never put all your eggs in one basket.’ That's a good message with Easter fast approaching – and it could also be the theme for those of us saving for the basic state pension for our retirement.
As we know, the Government has a programme in place to gradually raise the age for the state pension. By October 2020 state pension age will rise to 66, and by 2028 it will rise to 67.
There had been a further rise to 68 planned for 2046, but a new major review of state pension planning (the Cridland Report) recommends that this rise be moved forward by at least seven years, to happen between 2037 and 2039.
If you read this column regularly you will be aware that the cost of providing the basic state pension is an enormous and increasing burden on the coffers of the state. In fact, some would say it’s one big financial accident waiting to happen. The structure of the state pension scheme is already creaking and groaning and, sooner or later, something has got to give.
To briefly recap on why: as pensioners live longer, they draw the state pension for longer. The Government actuaries department said lately that people who retired in the past decade are now expected to spend a third of their life receiving the state pension.
As a result, the ratio of people paying into the scheme (ie the workers) versus the number of those drawing their pension out is shifting – and not in our favour.
Here’s why: at the moment there are three workers paying in, for every pensioner taking out. This is called – you may remember the phrase – the ‘dependency ratio.’ However, by 2025 the number of people aged 85-plus in Northern Ireland will increase by 25,000, or 83 per cent, according to a Stormont health spokesperson.
This will alter the dependency ratio and it is expected that by 2050, the number of workers compared to the number of retired people will fall from three-to-one to one-to-one. That’s just one worker paying in, for every pensioner drawing the state pension.
Cridland’s proposal to speed up the rise in the state pension age acknowledges the changing dependency ratio, and seeks to keep us working and making our National Insurance contributions for a longer time, and drawing our state pension for a shorter time.
Cridland further recommends removing the ‘pension triple lock’, a failsafe mechanism designed to sustain the buying power of the basic state pension. The triple lock dictates that state pensions will rise in line with earnings, inflation or 2.5 per cent every year - whichever is the greater. It's designed to offer security to people dependent on state pensions to make ends meet.
Again, this could be seen as a concession to the fact that the basic state pension is – to put it bluntly – getting ‘too dear’ for the Government.
The bottom line is this: it may be a foolish strategy to make any assumptions about how the state pension will look when you retire, and when you are going to get it.
This is especially true if you are in your 20s or 30s right now, with, as JFK once said, ‘miles to go before you sleep.’
Don’t depend too much on a state pension which, through 30 or 40 years of continuing government tinkering, could have changed utterly, and could be much less generous, by the time you come to retire.
Do you want to take control of your future, and leave nothing to chance? It may be prudent to set up a personal pension for yourself right now, as a main income stream in your later years.
With all the pressure building inside the state pension scheme right now, it’s a pressure cooker that could just blow its top.
If you want to ‘Basque’ in comfort and luxury when your working days are done – then whatever you do, don’t put all your eggs in one basket!
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005
