Do you like or loathe stormy weather?
Well, as far as our pensions go, there may be storms on the horizon.
In certain areas of the pensions industry, experts say the situation today is not sustainable, and is likely to blow up into a storm in the future.
Often this simply applies to the fact that we are not saving adequately for our retirement – Scottish Widows believes that would mean we should save at lease 12% of our income every year – so that many of us will not have the lifestyle we would wish for in retirement, or even become trapped in the workplace and have to work on past retirement age.
However, another major storm brewing involves the structure of the State Pension.
The State Pension scheme was founded in 1908, and the first pensions were paid on 1 January 1909 to around 500,000 people in the first year – although in those early days, you had to be 70 or over to benefit.
The problem is that the State Pension is an ‘unfunded' scheme: our National Insurance contributions are held in a massive money pool, but not invested in the stock markets or elsewhere. As we pay in, the money is available to be paid ‘out the other end' to those already drawing their pension in retirement.
The Department for Communities (DfC) tells us that 98% of retired people draw the State Pension.
Why should that fact concern us? Because these days we are all so terribly healthy, that's why.
We're just not dying off as obligingly as we used to, which is causing a major headache for the Government. The number of over-65s in Northern Ireland is expected to grow by 25 percent by 2026, and the number of over-85s by 40% (Source: Nisra). Average life expectancy a century ago was 60; today it is 81.
This means a much larger group of retired people living much longer retirements and drawing the State Pension for longer.
Meanwhile the taxpayers and workers are falling by proportion. Today there are 3 workers paying into the State Pension for every 1 worker drawing out. But by 2050, this ratio, known as the ‘dependency ratio', will fall from 3:1 to 1:1. In other words, for every pensioner taking out, there will soon just be one worker paying in.
This will create a massive pressure on the State Pension scheme, some are predicting the scheme would collapse if we continued as we are today. It is more likely that the State Pension could be restricted or reduced.
We already have a plan to gradually increase the State Pension Age (SPA), the age at which you can begin drawing out of the scheme. The Pensions Act 2011 will raise the SPA to 66 for both men and women by 6 October 2020. Under the Pensions Act 2007, the SPA for both men and women will be raised to 67 between 2026 and 2028, and to 68 between 2044 and 2046. How old will you have to be, to take your State Pension?
As a result of later and later State Pension payments, many of us now feel we may be ‘trapped in the workplace', unable to stop work as soon as we would like.
Scottish Widows told us recently that nearly a fifth of adults in the UK (18%) now believe they'll have no choice but to work beyond age 65. That's one in 5 whose pension planning has let them down, and failed to meet their expectations.
Given all this doom and gloom about the future of the State Pension, many people now see they may need to have a second and possibly main income stream in retirement. This could be a workplace pension, or a personal pension they set up by themselves.
If you believe a personal pension could right for you, then the earlier you take advice and action, the better – we all need to invest in an umbrella, if there's going to be a storm!
Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005 . Further information on our Facebook page “Kennedy Independent Financial Advice Ltd” or our website www.mkennedyfinancial.com