Once upon a time, people stopped working at age 65 and enjoyed years of golf and grandchildren funded by a reliable monthly income from state pensions. In 2012, that fairy tale has become a joke. Here are five reasons you’ll never retire unless you start thinking about your future!
1. State pensions diminishing
In the UK over the last three decades, life expectancy has increased substantially. In 1981, a 65 year old man could have expected to live for another 14 years on average, to age 79. However, in 2011, a 65 year old man can reasonably expect to live for another 21 years, to age 86 on average.
These substantial improvements in life expectancy reflect a complex range of changes in lifestyle, diet, healthcare and patterns of work and economic activity and could be positive for individuals. However, increased life expectancy also poses significant challenges to individuals, to employers and to the Government. Individuals who live longer may have increasingly long retirements to save for and support, employers who sponsor Benefit schemes face increases in the costs of providing these pensions and the Government may face increased pressure from funding the state pension and benefits for pensioners.
The Government is keen to encourage people to work longer in order to combat the potential financial problems both for the individual and for the state posed by a declining birth rate and increases in longevity.
2. Dropping income
Living standards for low and middle income households will be poorer in 2020 than they were in 2008, according to a “sobering” report. Even if growth returns to the UK economy in the coming years, incomes for the lowest groups are set to fall by up to 15% by the end of the decade.
Gavin Kelly, chief executive of the Resolution Foundation, said: “This is a powerful wake-up call - it gives us the most detailed account to date of the bleak outlook for living standards over the next decade if we fail to tackle some of the underlying weaknesses in our economy. It suggests that millions of families will struggle, to an extent we have not seen in other periods of growth, to progress and raise their incomes. It’s particularly sobering that this outlook is based on optimistic assumptions about growth in the economy with a steadily rising number of people in employment.”
3. Higher child care expenses
New figures compiled by Daycare Trust show above-inflation increases in the price of nursery care in Britain with the hourly rate for a child aged under-two up 5.8%. The increase for a child aged two and over is 3.9%. In the same period wages have remained stagnant, only increasing by 0.3%.
At the same time new HMRC figures reveal the impact of the Government’s cut to financial support for childcare costs in April 2011. By cutting the maximum level of support available through the childcare element of Working Tax Credit from 80% of costs to 70%, the average claim has fallen by over £10 per week, costing the low-income working families that receive it more than £500 per year. Furthermore, 44,000 fewer families are receiving this help with childcare costs.
Daycare Trust’s survey reveals that average childcare costs now exceed £100 for a part-time place (25 hours) in many parts of Britain with the average yearly expenditure for a child under two standing at £5,103. The most expensive nursery recorded by this year’s survey costs £300 for 25 hours care – that’s £15,000 for a year’s childcare.
4. Collapsing investment returns
Insurers Aviva, Standard Life, Friends Provident, Legal & General, Equitable Life and Prudential, which together have about ten million with-profits customers, have all posted their latest with-profits results.
Investment performance has varied. Last year, Prudential grew its main fund by nearly 19% while Legal & General’s rose by 14%. In contrast, Aviva managed only 6.6% growth and Standard Life 6.2%. Equitable boosted its policy values by 5.5%. But more important, most insurers continued to cut maturity payouts on with-profits investments, continuing a long-term decline.
A 25-year £50 a month endowment with Standard Life that matured in February 2001 paid £110,136, representing an average growth in excess of inflation of nine per cent a year. A similar plan being cashed in today from the insurer yields £28,139, which is inflation plus just 1.15 per cent per year. Even Prudential, one of the strongest with-profits performers, has seen payouts fall. A ten-year bond with an original investment of £10,000 that matured in September 2002 in the depth of the stock market slump paid £22,415. An equivalent bond maturing today pays £14,346.
These numbers reflect not only market falls in 2008 and 2009, but longer-term changes to the companies’ investment mix and bonus policies.
5. Insufficient savings
The Scottish Widows Pensions Report has revealed a disturbing trend which appears to have been exaggerated by the UK recession. The number of people in the UK saving for their retirement has fallen to its lowest level for four years and there is particular concern about ladies over the age of 50 who have been singled out as the most at risk area of society with regards to insufficient savings in their retirement. So what is happening?
The report has found that just 48% of people in the UK are saving for their retirement which is down from 54% last year and is the lowest level for four years. The report also suggests that 21% of those in the UK who could save are in fact putting nothing aside, leaving themselves open to a potentially lower standard of living in their retirement years. While there is no doubt that the recession has obviously impacted upon the ability of many people to save money for retirement, it does look as though pensions and other similar savings schemes are bottom of the list for many people.
Even if you save up enough money, unexpected expenses could ruin your well-prepared plans:
- What if you get sick and need expensive care?
- What if you have unpaid debts?
- What if there’s a financial crisis that slashes the value of your retirement savings?
Sure, there’s a chance that you’ll enjoy an idyllic retirement. But for most people, retirement is dead.
The introduction of the Pension Auto Enrolment Scheme is looking to alleviate these issues. For more information, please read our article at http://www.contractorumbrella.com/pension_auto_enrolment.html .