Planning for Retirement

Planning for future pensions — state, occupational and private — is extremely difficult in the context of high economic and political volatility. Investments that have the best growth prospects over the next 30 years include land for forestry and farming, mines and wells, biotechnology, and energy efficiency products and services, but the ordinary pension saver is unlikely to have easy access to pension funds specialising in these sectors.

Workers on ordinary incomes have better pension prospects in the public than the private sector. The high tax rates that will be necessary to pay public-sector pensions will make it even harder for private-sector workers to save for their own pensions. In any case, participation in private and occupational pensions is not common until after the age of 25 and peaks among 45 to 54 year-olds. Problems weighing on pensions include pensioners' increased longevity, higher taxation demands on pension funds, the collapse in investment returns in the early 2000s and in 2008, and the levy to finance the Pension Protection Fund for occupational schemes. There were only 37,540 open occupational schemes in the UK in 2006, a fall of 40% since 2000, and within this total there were fewer than 5,000 open defined-benefit private-sector and quasi private-sector schemes.

Personal pensions are failing to attract subscribers in sufficient numbers to compensate for the decline in occupational pensions. Most personal pension fund sizes are very small. In April 2006, among women aged 35 to 44, 89.8% had less than £30,000 in their pension fund, compared with 78.7% of men. Self-Invested Personal Pensions (SIPPs) cater for affluent contributors and are often restricted to those with pension funds over £100,000. SIPPs enable contributors to make their own decisions, within some limits, on where their money is invested.

Personal Accounts are the Government's proposed initiative to increase the pension savings of people on low to moderate incomes, but are not planned to start until 2012. Demands on individuals' incomes are increasing at such a rate in 2008 that the likelihood of greater voluntary pension saving seems dim, except at the top of the income scale, and some form of compulsion is looking increasingly inevitable.

The UK's low state pension — £90.70 a week in 2008/2009 — is augmented by means-tested credits, which are complicated to understand and claim. The Pensions Reform Group proposed a universal protected pension (UPP) of 25% to 30% of average earnings, but the Government rejected the plan, instead choosing Personal Accounts. Personal Accounts — contributory plans into which workers will be enrolled automatically, with provision to opt out — should be available from 2012. The framework for Personal Accounts is in the Pensions Bill 2007, which also included gradually raising the minimum state pension age to 68, reducing the number of years of National Insurance contributions to qualify for a state pension and converting the State Second Pension (SSP) into a flat-rate supplement. The objective of these changes is to persuade individuals to take more responsibility for their own pensions, with the SSP as a safety net for unpaid carers and low earners.

A more liberal regime for maturing retirement funds began on 6th April 2006. Retirees no longer have to purchase an annuity by age 75, thus opening the door to different retirement products.

There are two main types of equity-release plan: lifetime mortgages and home-reversion plans. A lifetime mortgage enables the homeowner to borrow a percentage of the property's value without any repayments until death or sale. Home-reversion plans allow homeowners to sell all or a part-share of their home for a capital sum or an annuity, and the right to remain in the property for life or until going into long-term care. A high rate of home ownership and inadequate pension provision have driven the equity-release market.

The equity-release market as a whole has shown undulations rather than consistent growth, although the flexible lifetime mortgage segment shows rapid expansion. In a falling property market, guarantees of no negative equity on lifetime mortgages can be very risky for the financial-services sector, in similar fashion to subprime loans.

Latent demand for equity release is expected to remain strong, but there is a risk of a downward wealth spiral, as the retired generation increasingly cashes in its assets and has little to leave to its heirs. There is also the possibility that the extent of remortgaging before retirement could restrict the potential for equity release after retirement. The rise of sale and rentback is also a potential threat to future equity release.

The proportion of the UK population needing to worry about wealth management is, in 2008, falling quite fast, as heavy debts and falling property prices created a feel-bad factor. On the other hand, the personal wealth of the most affluent individuals is still increasing. To an increasing extent, national government revenues come from those without access to, or from those who choose not to access, these supra-national circuits.

Wealth management is a niche business, although inheritance-tax planning has wider relevance, especially in regions with expensive property. Inheritance-tax planning is most worthwhile for individuals with estates worth more than £312,000 in 2008/2009. Typically, around 35,000 estates a year are subject to inheritance tax.

Good long-term residential care is very expensive, but less than 0.1% of the adult population has long-term care insurance. Around one in five of the over-85s receives long-term care; by 2010, that will be approximately 280,000 people. In addition, nearly one in ten 65 to 74 year-olds needs long-term care.

Improvements in pensions regulation in Organisation for Economic Co-operation and Development (OECD) member states adds to the costs of scheme management and administration, and makes small contributions to personal and occupational schemes less economic for providers. The problem of administering small contributions at economic cost will be an important issue as individuals are told to take more responsibility for funding their own retirements.

UK pensioners often complain that the state pension is too low, but the UK compares well with most other EU countries in its total public expenditure on old-age social benefits. The issue in the UK is the concentration on means-tested additional benefits, which keep the basic pension too low to survive on. All over the world, retirees with inadequate incomes will have to look for work.

Public and private debt will limit individuals' capacity to save for retirement. In addition, the recent experience of rising longevity means that more adults have to become carers for older relatives, restricting their earnings from work.

The productive base of the economy has become too narrow, but energy shortages will spur economic restructuring that should create a broader range of job opportunities than at present. On the other hand, in a future of scarcer and more expensive resources, government will struggle to maintain, let alone increase, levels of public spending. As a consequence, it will be difficult to fund health improvements leading to still higher longevity, and the number of years spent in retirement could even fall.

The extended family is likely to assume greater importance as a social, economic and financial-planning unit, provided that forces leading to family breakdown can be held in check. The relocalisation of industry — to serve super-expensive and climate-changing transport costs and emissions — should enable more members of extended families to live near each other and create mutual support networks. A stronger layer of small to medium-sized family businesses should contribute to more equitable income distribution.

Personal Accounts are at the heart of government plans for pension changes from 2010, but the proposed contribution levels are too low. Future legislation could include an `ageing levy' added to National Insurance, to fund long-term care for people without sufficient resources of their own.

Private-sector developments include Life Trust Holdings' Longevity Payment Plan, which was launched in January 2008 and provides an income that increases with age. The US insurer Lincoln launched Elderly Care Benefit into the UK in 2008. This is a critical illness policy covering those illnesses that result in the victims needing long-term care. Family pensions are another idea. The Family Pension Trust from Rowanmoor Pensions is a self-invested personal pension established under trust for more than one contributor, either family members or business partners.

At present, the halfway house of a low basic pension plus extensive means testing persuades many people against saving. One policy option for the future is to reduce state retirement spending and force individuals to take responsibility for funding their own pensions, with a minimal welfare safety net. Another option is for the state to take on responsibility for providing a non-means-tested pension that is sufficient for living in moderate comfort.

Retirement planning is not just about pensions, but should include wider social policies; for example, to encourage family-based economic activity and multi-generation housing.