MANY MEMBERS OF the baby boomer generation currently retiring belong to an ever diminishing club who didn’t need to put a great deal of thought into their pensions. Under traditional final salary/defined benefit schemes, which were extremely common in the 70s and 80s, employers promised employees a set amount per annum when they retired. This enabled your average Joe to live out the rest of their days on the combined pension they receive from the state and their former employer in relative financial security – especially if they owned their own home, which is the case for many baby boomers.
This is a distant dream for many subsequent generations. A seismic shift over the last few decades from defined benefit to defined contribution schemes basically means that it is now up to us as individuals to pay into our retirement funds, shouldering the investment risk which was formerly borne by the corporate sector.
It is also becoming harder and harder to generate a sufficient and sustainable income from retirement provisions. Not only are we living longer, but painfully low interest rates and bond yields over a sustained period since the global financial crisis mean that we have to build a far bigger pot to generate the same retirement income as baby boomers, purchasing an annuity.
The current average salary in the UK is around £27,000. Let’s assume you were looking to live on two thirds of this in retirement and are therefore aiming to receive £17,800 per year (in today’s terms). With the current state pension at just over £8,500, that leaves a gap of around £9,000 a year. If you were to purchase an annuity guaranteeing you that sum today, it would cost you £260,000. To achieve the same back in 2002, if would have cost just £150,000. That’s quite a substantial gap in a relatively short space of time, and illustrates the harsh reality younger workers today are facing, especially given that home ownership is out of reach for many and will therefore have to factor in rental costs in retirement as well.
Even those who are lucky enough to still have a final salary pension have cause for concern given the enormous black hole in pension funding. The Office for National Statistics (ONS) estimated the UK’s total pension liability at the end of 2015 to be £7.6trn*. The lion’s share of that figure is linked to pensions which are the responsibility of central and local governments, including State Pension liabilities, however £2.3trn is for private sector employee pension entitlements, of which £2trillion is due to final salary pensions.
And the problem here is that many pensions are in huge deficit – even those of some of Britain’s giants of industry including Shell, BP, BT, and Tesco. A survey last year revealed that the companies in London’s FTSE 100 index had a combined pension deficit of around £17billion. Carillion hit the news at the beginning of the year when it went into liquidation leaving a pension deficit of almost £1 billion, and it transpired that in the 7 years prior to its collapse, Carillion paid out £500 million in dividends compared with just £280 million towards its pension fund.
That’s why it is absolutely essential to review the funding position of your final salary pension if you have one, scrutinising the health of the company it might be tied to. Your research may reveal that it is in your best interest to move your scheme into a Self Invested Personal Pension, or SIPP. SIPPs have become even more popular since 2015 when the government revolutionised Britain’s pension system introducing ‘flexi-access’. New pension freedoms empowered savers to take control of what they could take, but the problem is that many savers lack the knowledge to make informed decisions regarding their pension pot and risk miscalculating what they need to keep aside to sustain a potentially long retirement.
If you have a money purchase (defined contribution) scheme, intend to move out of your defined benefit scheme, or if indeed you have already done so, you need to ensure that you have adequately calculated a sustainable drawdown and that the underlying portfolio is well managed, at a suitably appropriate risk level, based on your attitude to risk, your capacity for loss and your time horizon.
These are not decisions to be taken lightly which is why you should seek professional guidance from a qualified and trustworthy financial adviser. If you have a pension in the UK, or if you have already moved your pension scheme into a SIPP or a QROPS, it is a good idea to regularly review your portfolio. I have a wealth of experience working with British expats on their pensions and retirement provisions so please feel free to get in touch if you’d like to arrange a discussion.
* Source: independent.co.uk/money/spend-save/uk-pensionscrisis-retirement-bill-trilliononspayments-a8246156.html
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Sam is a UK-qualified Independent Financial Adviser and strives to raise the standards of international financial planning in Malaysia. He has been based in KL since 2009 and represents Infinity Solutions Ltd in partnership with UK-based Wealth Manager – Tilney Group. You may direct any inquiries to [email protected] or call +6017.3499 686
This article was originally published in The Expat magazine (October 2018) which is available online or in print via a free subscription.
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