THE BIG DEBATE: Pensions, retirement and working longer

RICHARD DIGARD: ‘People don’t care about pensions until it’s too late’

FORGET the politics of what Mark Helyar did or didn’t say about retirement age the other day because there really are only two financial truths about ageing.

1, You don’t start getting interested in pensions until it’s too late.

And 2, because of 1, everyone grossly underestimates the amount they need for a secure, happy and comfortable retirement.

Well, not everyone obviously. The very well off and people on final salary, index linked schemes (almost exclusively States employees these days) will be pretty insulated. You and me… less so.

The reason is that you need an absolute ton of money to buy an annual retirement income that can last up to 30 years. Any guesses how big a pot? Actually, according to Ravenscroft* it’s £629,515**. That’s for someone looking to retire at 60. If the cost-cutters in the States can keep you chained to the workbench until you’re 70, that pot falls to £468,240 (because of investment growth and you croaking sooner), hence the official enthusiasm for longer working.

But the other shocker is this massive lump sum doesn’t get you all that much – £29,909 a year in fact. I’ve quoted that figure because many advisers suggest 80% of pre-retirement income is a good starting point, so it’s based on island median earnings of £37,387.

If you think, blimey, me and the missus aren’t going to have much fun on that in our dotage, and to fund the odd bingo night and a weekend in Skegness means £45k is more like it, you’ll need a pension pot of £834,256. Start saving for that in your 40s, and that’s £1,613 a month please, on top of your mortgage or rent.

Hence my point about not caring enough about pensions until it’s too late. Get your grand-kids in their 20s in the savings habit and a 45k wedge at 75 (the time when they may be permitted to stagger from the workplace) costs just £200 a month.

These figures are for private schemes only. If you’re in a workplace pension, your bosses can chip in a fair old whack. It varies according to employer but the average, according to gov.uk, is 3%, with 5% from the employee.

It’s a different kettle of fish if you work for the States, however.

At the end of December 2020, government was contributing (with your money) 19.8% to its final salary scheme. If you were a so-called special benefit group, like the Crown Officers, police or firefighters, that could rise to nearly 35% – a lavish benefit indeed.

It’s why the States superannuation scheme paid out a total of nearly £216m. in pensions to its ex-staff in 2020 alone – around £4m. a week or £40,686.27 per pensioner. Incidentally, that’s an increase of £34m. since 2016.

But what’s this? The States OAP, which seems to exercise Deputy Helyar and others so much, will pay out ‘just’ £157m. this year – a max of £13,000 per annum after years of toil and exertion and below what UK advisers consider to be sufficient for a minimum lifestyle.

OK, a state pension and an occupational scheme are very different animals – safety net v. jam on your bread, if you like – but the contrast here is particularly marked, as is the cost to taxpayers.

So, two takeaways. Always rely on politicians to go after soft targets and never rely on them to have your long-term interests at heart.

So start saving – or work for the States.

*Other advisers and estimates are available.

**The results presented by its calculator are hypothetical.

HAYLEY NORTH: ‘Who wants a population who are toiling away until 75?’

FURTHER extending the state pension age is unkind, uncompetitive and unrealistic.

My Dad, who had worked since he was 14, died at 64. How nice would it have been if he had been able to slow down a little before then? While in the UK my expected pension age is 67, in Guernsey it is 69.

This discrepancy is already problematic given our close ties, and who wants a population who are toiling away until 75 when they should be enjoying a well-earned rest?

That is not the kind of society I want. It’s my generation being asked to tolerate huge shifts in when benefits can be taken and we don’t have long enough left before retirement to take this into account.

There is much, understandable, resentment from younger people that those born before them have benefitted from huge house price increases and, in many cases, very generous private and public pension arrangements and early retirement. It is not right that these islanders are footing the bill now, only to also be paying their own way later on. A state pension is a core element of all my retirement planning for clients and to means-test when many of them are half-way there would be unfair and a disincentive to private saving.

The only fair way, as an island, that we can manage the expected increase in pension burden over time (the costs will continue to soar) is to get more people working and continue social security contributions into retirement where affordable. We also need to consider introducing taxes on capital gains. Compulsory health insurance for those who can afford it (particularly those who move here after retirement) should be considered sooner rather than later.

We all have to accept we have a part to play here.

In the UK, personal pensions, which include workplace pensions known as auto-enrolment (called secondary pensions in Guernsey), have a high take-up rate.

It is usually the self-employed who are least likely to have a pension. I know of many people living comfortably on state pension benefits alone and others for whom it is just a part of the picture. The latter have invested some of their savings in the stock market or bought rental properties. It is costly to buy property however, and in Guernsey this is further complicated by a lack of housing stock. Although we need more homes to rent right now, we definitely don’t have enough houses for everyone to buy one to live off in retirement. The ideal scenario is to have income from a variety of sources when you stop work, this means you are not relying on any one income source at any one time; spreading risk.

To reduce the pressure on the state pension, we urgently need to encourage residents here to consider long-term investment in stocks and shares to better provide for their retirement. Investing can seem both frightening and risky but you don’t need millions to invest and it makes such a difference. Putting aside just a portion of your income each month while you are working can deliver huge rewards by the time you retire and most investment companies are happy to accept smaller clients. Secondary pensions, when available, will also offer affordable, regular investment options.

It would help islanders to gain confidence if there were better protection for investments in regulated funds as there is in the UK. In Guernsey only banking deposits are currently protected which can make investing more daunting for some and understandably so.

HORACE CAMP: ‘Link retirement age to life expectancy’

THIS discussion is not really about retirement age, but pension entitlement age.

In 1869, Otto Von Bismark (yes, the one with the pickelhaube and the glorious facial hair) decided to establish a state pension for those over 70.

At the time the life expectancy was about 40. In 1909 the UK introduced a pension entitlement age of 70. Life expectancy was 50.

By 1950 the pension age had fallen below 70 but the majority of men left the workforce when they were 67.

The work place was very different in 1950. Work was far more physically demanding, in both factories and on the farms. People entered the workplace under the age of 15 and then worked manually for 52 years before they decided they could work no longer.

That pension age of 65 to 70 seems to have become accepted by society as the work cut-off point, not because people aren’t able to work longer, but because they don’t think they should. The very basis of a state pension had changed from a social need to help those no longer able to work into a right to a pension at a cut-off age based on out-of-date requirements.

At first this wasn’t too bad because medical science had still to make great leaps and, though life expectancy ticked up a bit, enabling more people to live to pension age, it was still reasonable to quit manual work at 65.

But in the interests of equality, workers who could have kept going also dropped out of the workforce.

Pension payment years were relatively few and many did not live long enough to claim. Therefore contributions into pensions could be fairly low and still be affordable to the state. Many of us had contribution rates much lower than today for that very reason.

But then medical science threw a spanner in the works.

Not only did it extend mortality and let more people make it to pension age but it doubled, trebled and more the number of pension payments a retiree could expect to receive. The other thing it did was improve health so much that at retirement age people were physically able to continue working for at least a decade post-65.

By not recognising just what was happening and making major changes to pensions, either by seeking top-up contributions from older people who had paid contributions based on them dying much sooner, or by linking pension age to life expectancy, it all went horribly wrong.

But luckily, by increasing contributions on the younger generation, it would sort itself out. Except then fertility rates started dropping and the younger generation turned out to be a shadow of the older one. And so we find ourselves in a mess.

People perfectly able to work well past retirement age demand the same pension age as their shorter-lived parents, but refuse to acknowledge that their contributions only bought them about five years of retirement when they want 20.

There is an answer. Link the retirement age to life expectancy. Life expectancy minus 10 gives us around 71. Perhaps Bismark got it right after all.

Bismark once said, ‘the great questions of the day will not be settled by means of speeches and majority decisions but by iron and blood’.

I’m not suggesting the pension age is raised at the point of a bayonet, but I wonder how many of our representatives have the metaphorical iron and blood to make it happen.

LORD DIGBY JONES: ‘There was never enough money to fund pensions’

IT ALWAYS used to be so simple. We worked until we were 65 (or 50-something if we lived in France), we retired and then we did the decent thing – we died at 68.

Nowadays we’re living until we’re 82 and yet the financial structure of state universal pension provision for, on average, a 14-year-long retirement, rather than three, is expected to cope without bits breaking off.

The truth is there was never enough money to fund pensions – it’s just that no one ever lived long enough to find out.

Something obviously has to give, either on the way in (contributions) or on the way out (the date that pension payments click in and their quantum).

What is so diabolically wrong about telling a 50-year-old today that they are not going to get any state pension until they are 68 and a 45-year-old that pension payment day will be their 70th birthday?

Provided that contributions that have been made over the years are always returned on an actuarially-calculated basis, what is wrong with means-testing income in retirement to calculate the quantum?

And if there is currently more than a whiff for much-needed reform in the air, why not reform the whole damn edifice?

The ‘taxation that dare not speak its name’, social security payments or national insurance contributions, could be scrapped and the rate of basic rate income tax commensurately increased, then there would be a fair few years of phasing out and phasing in of that which would become what, in reality, has always been the case – compulsorily paying part of one’s income to the state while earning, in return for receiving some form of state pension after a certain age until death.

Easy to understand, cheaper to administer, fewer people required to run it all, transparent to means-test, and if we all carry on committing the heinous crime of living longer, then we would all quickly come to realise our taxes have to go up solely to pay for our pensions – and we have to work a few more years of our increasingly healthy lives to provide for our hopefully longer retirement.