Pensions are like a box of chocolates...
‘Life is like a box of chocolates. Yuh just never know what you're gonna get.'
The immortal words of the legend that is Forrest Gump. (Only the best sources quoted in this column.)
Well, even though we're clearly dealing with a man who can't read the menu on a box of Roses, let's run with him for a moment.
Forrest could well have been talking about pensions, and here's why.
A few weeks ago, we discussed the three generations currently saving for the future, pointing out that a comfortable retirement is far from a certainty in this time of austerity.
The words and terms used in the pensions business always reflect the current reality. These days, many of us can only ‘aspire to retire', the state pension is buckling and creaking under extreme pressure and has been called a ‘pensions timebomb', and consequently the greatest fear is the spectre of ‘pensioner poverty'.
First there are the ‘baby boomers', those born shortly after World War II, who are in their 60s now. Here, women in particular may have spent their working lives hoping to retire at 60, but now find that their state pension will not be given until they are 65, rising to 66 for both men and women retiring after 2020.
Then there is Generation X. Born in the 60s and 70s, now in their 40s and 50s, they hope to retire over the next three decades.
Then comes the third generation, those born from the mid-1980s onwards, who reached young adulthood in the early years of this millennium and now stand at the start of their career. We call this generation the millennials. Experts at Nest, one of the large pension schemes, say that for millennials entering the workforce now, investments made on their behalf must deliver sustainable returns for at least another 40 years, to ensure a comfortable retirement.
Let's focus on the latter two groups here, starting with Generation X, and look at some comments made recently by Steve Webb, the former government pensions minister and now the director of policy at pension company Royal London. If you are in your 40s or 50s, listen up! You younger workers talk among yourselves, I'll get to you in a minute.
Steve points out that if you are an ‘Xer' you have seen major changes in the type of pension you have. The older and generous defined benefit (or ‘final salary') pensions, where you had some guarantee of what you would be getting, are pretty much closed to new members, and you are now saving into defined contribution or DC pensions.
DC pensions are like Forrest's box of chocolates - you never know whatcha gonna git. You know only what you're paying in, with no guaranteed return. Moreover, in comparison to defined benefit schemes, there is less money going in, and you will have a longer working life, at the end of which you'll likely have a much smaller workplace pension than your parents.
Now we come to you younger workers in your 20s and 30s. As millennials, you don't have it so good either. Steve mentions the three greatest challenges that are or have been faced by millennials in terms of financial planning: pensions, housing, and student debt.
If you are a young worker, you belong to a generation that has had the goalposts moved. You may well have joined the workforce with heavy debts from funding third-level education. No more of the student grants that were around in the 1970s and 1980s!
This hinders you from owning a house right away, and also impacts your ability to save for your pension. Steve says that, while many of today's younger workers will still become home owners, it will be much later than your parents did, and you will be renting a lot longer before you do.
In fact, a report this year by the Resolution Foundation suggested that, in order to address your particular situation as a younger worker, you should be given £10,000 just to offset the disadvantages you have in pension saving.
While accepting that no government is likely to do this, Steve agreed it does show the seriousness of the relative disadvantage that young workers face.
He also said that if he'd been pensions minister for a little longer, he'd have taken steps to ensure that both Xers and millennials were saving more for their retirement, for instance by requiring people to pay more into their workplace pension whenever they got a pay rise.
Are you in your 20s, 30s or 40s and do you ‘aspire to retire'? Would you agree it's not as easy as it used to be?
Perhaps it's time to sit down with an independent pensions adviser, to plan ahead and maybe set up a personal pension as a second or third income strand in retirement.
That way, you know that one day you can hang up your trainers, and take it easy. We have the menu for your box of chocolates, we can tell you what you're gonna get.
Let us help you ensure that some day, you'll no longer have to ‘Run, Forrest, run'!
:: Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005 . Further information is available on the Facebook page 'Kennedy Independent Financial Advice Ltd' or the website www.mkennedyfinancial.com