Opting Out Of Pension Schemes

Opting Out of Pension SchemesSimply put, opting out of pension schemes may no longer be an option. In the last 30 years the longevity of the UK population has increased significantly with the number of centurions growing five-fold to over 12,500.  Scientists now believe that with recent breakthroughs in regenerative medicine, the first person to live till their 200 has already been born.

There are now more than 11 million people aged over 65 and with another 5 million expected to join them before 2032, the UK economy faces a pressing dilemma.

Not enough workers to support the retired

The first is that the cost of the state pension is met directly from the National Insurance paid by those in employment and it’s getting harder and harder to foot the bill for our longer and healthier retirements.    In 1901 there were 10 people in work for every retired person.  Last year that ratio had dropped to 4:1 and by 2050 it’s expected to be as low as 2:1.

The second issue is that suddenly our time in retirement could end up being longer than our time in employment.  Good news?  Well yes, but only if you have the sufficient resources to provide yourself with a sustainable income.

New legislation has to be introduced

These issues have been the driving force behind the Government’s introduction of automatic enrolment into work place pensions.  Since last October 2,256 of the largest UK firms have gone through the process and in the first 6 months of 2014 another 29,000 will have to do the same.  The early signs of its success are encouraging with only 9% of eligible employees choosing to opt out, however the government faces an uphill battle to convince everyone and may be missing a trick in explaining the more obvious benefits.

Interviewing a group of factory workers on BBC Breakfast one employee announced:

I’m not letting some fat-cat gamble with my money.  I’ll be opting out at the very first opportunity.  A pension is an expensive waste of time. I’m keeping my money in the bank.

I wouldn’t disagree with his final comment.  Using alternative types of investment to supplement your retirement can provide you with the increased flexibility that you might not get from relying purely on a pension but the issue here is one of longevity and ignoring a pension that provides a guaranteed level of income for life is a dangerous game.

Based on historic rates of inflation it has taken only 25 years to drop the real value of £1 of income by more than 50%.  This in its self should be depressing enough but add in some of the lowest deposit rates of interest in the last 5 years and suddenly its not just inflation that’s the problem.  If you continue to take out more than is paid in interest its erosion of capital that’s becomes the large elephant in the room and if we are living well past 100 you could find yourself running out of sticky buns to feed it.

Extra money for nothing

With compulsory employer contributions auto enrollment presents the opportunity to boost your retirement income like never before.

Someone paying £40 per month into an investment ISA for 30 years will have a fund after 30 years (assuming 6% growth) of £28,100.  Not a bad return on your money of 95%.  Compare that though with someone making the same net contribution but receiving both 20% tax relief and a matching gross payment from their employer. Incredibly for the same personal outlay of £14,400 during that 30 year period the fund will have grown by almost 400% to £70,200.

Surely if the government wants to encourage the country to save into a pension that is the sort of information they should be handing out.

2016-10-23T16:49:34+00:00 November 21st, 2013|Pensions|0 Comments

About the Author:

Paul Milnes
Founder and Director of JPM Asset Management