Planning for retirement – you’re on your own
The UK’s retirement planning industry is under pressure as many of the traditional assumptions underpinning the previous system are challenged. Saving for retirement is vital if people are to avoid long-term poverty in old age and financial advisers have a crucial role to play in helping clients achieve their long-term aims.
However a combination of current economic and stock market uncertainty plus long-term trends affecting Government and employer pension provision is making it more difficult for individuals to plan for their retirement.
Ongoing stock market volatility has meant that savers with private pensions have seen huge falls in their funds. At the same time the pension income available to new retirees through annuity purchase has suffered. Analysis from Investment Life & Pensions Moneyfacts shows annuity rates have dropped to their lowest level ever and are as much as 40% lower than they were 15 years ago. A 65-year-old man now receives £645 a year income from every £10,000 invested compared with £1,145 in 1994.
Employers are cutting contributions to their workers’ defined contribution pension schemes as the economic downturn hits their revenues. Final salary – or defined benefit – schemes continue to decline. Mobile phone group Vodafone and airline BMI are the latest companies to announce they are shutting final salary scheme to existing members.
Governments have cut back the value of State Pensions and relied on employers to take the role of providing pensions.
Increasingly where companies offer pension schemes they offer defined contribution schemes rather than defined benefit schemes. Just 23% of final salary schemes remain open to new members.
The recent economic and stock market issues have crystallised the issues for savers as the value of funds have plummeted in line with volatile markets.
However problems have been building up for years. Analysis shows someone who paid £24,000 contributions over the last 10 years into a defined contribution pension scheme, invested in the stock market, would now have a fund worth £21,000.
Defined contribution pension schemes have fallen more than 25% since the start of the credit crunch. The recent strong stock market performance has provided some relief but people who retired in 2009 will have had to bite the bullet.
Pension planning has traditionally relied on stock market growth to provide good pensions but recently that has not been the case. Of course in the long-run equities still offer the best bet for savers but getting the timing right is not always possible.
The entire UK pension system has been based on a bet that equities will always do well enough over the long term to deliver retirement income. Generous final salary schemes from employers – as well as forecasts for good personal pensions – relied on the equity gamble paying off.
The idea that equity markets might not deliver over the long term was never seriously entertained. Nobody explained to workers that they were effectively gambling their retirement security on the stock market without any form of insurance to protect themselves against the risks of poor equity returns and rising life expectancy.
A survey by MetLife of people aged 55-64, illustrates the human cost of the credit crunch. More than half (54%) said their pensions would fall short of expectations and a third thought they had wasted their money and wished they had not bothered with pensions. A majority (56%) said they would now continue working into retirement.
The financial services industry worked hard to produce alternatives. Savers can consider drawdown and stay invested in shares in the expectation that a stock market recovery will boost their pension pots in the long term. But this implies more risk and people who have already taken a risk and seen it fail may not be too keen on taking yet another risk in the chance of winning.
About MetLife
During its 140 year history, MetLife has developed into one of the most powerful and respected brands in financial services. Financially strong, stable and trustworthy, we’re now the second largest insurance group in the US, with operations throughout Europe, Latin America and Asia Pacific – and we’ve now brought our expertise to the UK retirement and savings market.
MetLife’s guaranteed options represent a major breakthrough in UK financial services at a time when they are needed most. So, whether your clients are planning for their retirement or saving for the long term, our savings and retirement products can be recommended with confidence.
There are alternatives for those in pre- and post-retirement phases. They can invest in equities but take out insurance against the potential downside. Everyone knows their house could be damaged by fire or flood and that they may need insurance against these risks.
But pension savers have not considered that their pension could be decimated by poor stock market returns over the long-term. So they didn’t know they needed to consider insuring themselves.
But insurance is available. One of the ways to do this is to look at products known as unit-linked guarantees or variable annuities which offer capital and income guarantees. They come at a cost but offer genuine security for people planning for retirement. It is a price worth paying when blind faith in the traditional view that long-term investors would always do well in the stock market has unfortunately let millions of people down.
The current economic conditions will improve but the issue about long-term planning for retirement remains. Clients need good ongoing financial advice in order to maximise their retirement income and challenging the traditional thinking about pension investment is long overdue.