The Pensions Deficit – There’s Trouble Ahead

Now, your eyes might glaze over at the title of this post. But please, you have no idea how important this is. I thought long and hard after my recent post about the rise of self employment and I began reviewing, as I always do about this time of year, my yearly accounts, my state pension record and my NI contributions over the past 12 months.

According to my records I stand to receive a whopping £159.99 a week when I retire at 65 (check – IF I retire at 65). And that is only if I contribute another 12 years in full between now and when I retire. If I don’t contribute any more, I am currently looking at £106.01 a week. And that is all I will have unless I make further provision.

The alternative is to continue to work after 65 provided I am able to, because clearly the state pension isn’t going to get me by unless in 23 years time I can survive on less than £700 a month, and who can do that now, let alone in 5, 10 or 20 years?

More than half of UK respondents (52 per cent), meanwhile,expected
be working past the age of 65, while only 20 per cent were confident
they would have a comfortable lifestyle in retirement.

Source: FT Adviser

At the moment, I am 8 years in deficit on my state pension. Five are due to being in full time education (college from 1996 and university from 2009), three are because I wasn’t earning enough. Thankfully only two of those are from when I started my business, but it has a lot to do with a Government change in rules in 2015 which means NI contributions are now voluntary for small businesses. Personally I think this was possibly one of the worst things the Government could have done. How many of us opted to keep the cash? I know I did. It is merely short term relief for potentially long term poverty.

The Government of course hopes you will have the sense to provide the short fall yourself by some other means, thus easing the burden on the pensions system in years to come, but is this a false economy? Are people actually making provision and if they don’t, what are the long term implications? Are millions of elderly people simply going to die in poverty? Figures for April 2017 show that the state pension was then the only income for over a million people, an increase of 26% over the last five years to 2017. What will that figure be this April, in 5 years or 10?

Private pensions, savings or investments are the only way forward aside from continuing to work. At the moment I have some savings but they aren’t going to get me far in retirement and they are really only there for emergencies because I don’t have anyone else to fall back on, meaning they could easily be spent at any time. They are also there to give me peace of mind and ease my cash flow because my income is unpredictable. That is a situation unlikely to change anytime soon.

I am very wary of pensions which are taxed at point of income and again once you withdraw them and in retirement that tax bill can be quite a shock. I would opt for savings over pensions any day.  But when they pulled the rug out from under interest rates on savings accounts, things really took a spiral. It wasn’t a lot of money, but it was a lot better than what I get now which amounts to less than £200 a year.

I am going to make a fairly safe assumption that my situation is not uncommon. In some ways I am possibly better off than many other small business owners. In other ways, I don’t doubt I am far worse off.  You will hopefully remember my chart from my last post, added here as a reminder. Now you can see how many people are going to be living off less than £700 in retirement, assuming they have contributed in full towards their state pension.

Figure 18_ Private pension wealth for employees and the self-employed for those aged between 35 and 54

I have two other options. Find a rich relative and kill all other possible benefactors, or marry rich. Neither seems like a good alternative to me or likely at the moment, so I’m just going to have to keep working on the other options for now.

At least I enjoy my work, which is why I took a risk with everything else in the first place. But these are not issues I can ignore forever. And neither should you. Don’t end up like this.

 

 

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