Pack your parachute before jumping off the pensions cliff
HAVE you a good head for heights? How do you feel about skydiving? I ask this, because it now appears that in the UK, we all face a ‘cliff-edge' drop when we finally move out of the workplace. A drop in income, that is.
And if you absolutely have to jump off a cliff, well, it pays to have a parachute.
The Organisation for Economic Cooperation and Development (OECD), the economic watchdog that looks at money issues on a global basis, has just announced that the UK has the worst state pension of any major country in the world. Ouch!
Their report said that a typical UK worker's state pension and other benefits will mean their income drops by nearly three quarters, to just 29 per cent of previous earnings, when they finally walk out that workplace door for the last time. This is the ‘cliff edge' we have to jump – hence the need for a parachute.
That measly 29 per cent compares with an OECD world average of 63 per cent, and lags far behind the figures for more generous retirement incomes of 80 per cent in Italy and the Netherlands.
The UK has long been known as the ‘state pensions miser' of Europe; now it appears that should read ‘state pensions miser of the world'.
Now, to be fair, the UK should also get credit where credit's due on the private pension side. It has one of the best levels of private pension provision, through workplace and personal pensions, which brings the average retirement income up to 60 per cent of former pay.
However, if you were earning the average national wage when you retire – which is currently £27,600 – then at 60 per cent of that you would be living on the poverty line, by current EU definitions. The official EU definition of poverty is living with a disposable income less than 60 per cent of the national average wage.
This shows that we tend to be a little insular around here, and we don't stop to see how things are being done in other countries, places where things are, perhaps, being done better.
The Department for Work and Pensions tells us that the auto-enrolment programme, by which all eligible workers are being automatically placed in a workplace pension, means that 11 million people were newly saving into a workplace pension by the beginning of this year.
However, under auto-enrolment, minimum contributions by employer and employee are just 2 per cent right now. Okay, this will rise to 5 per cent next month, on April 6, and to 8 per cent in 2019, but it's been a long time coming and, compared to other countries, still has a long way to go.
Look at Sweden, for instance, where workers pay 16 per cent of salary into the state pension system alone. That's before any other pension they may have.
Or take a look down under. In Australia's ‘superannuation' pension scheme (the ‘Super') companies have, for 25 years now, been required to make payments into their workers' pensions, contributions that currently amount to 9.5 per cent of salary. As a result, a 50 year old woman in Sydney can retire aged 67 with a pension equal to 72 per cent of her current earnings. Fair dinkum, cobber!
Australians also get into the driving seat with their pension. They get stuck in and dictate where their money is invested. They know they are not married to the fund chosen by their employer, they routinely switch their money into better performing investments to get the best out of their savings. You could do that too!
The Australian media are fully behind the nation's workers in this. League tables of best performing funds – some returning 10 per cent or more – are regularly published, so that savers can easily see how their fund compares. Financial advisers run seminars around the country, where workers can come to see what's on offer in terms of possible investments.
The tendency in the UK is quite different. Most of us pay no attention to our pension investments. In the past, we have reported that many of the larger UK investment funds, where your pension savings may be invested right now, are dismal underperformers that have been so for three or more years.
Not only is it necessary to take action today, to make sure you won't be reliant on the world's most miserly state pension – but you also need to ensure that your workplace or personal pension is invested where the sun DO shine – in the top-performing funds.
Make sure your parachute is properly packed, before you jump off that cliff.
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at “Kennedy Independent Financial Advice Ltd”