Saving for the future

December 18th, 2007 Written by Biz

One can scarcely pick up a paper these days without coming across a story of some impending financial crisis or other. Of the many scenarios the most often mentioned are; falling house prices and a declining housing market, increasing personal debts and bankruptcies, unstable banks, rising inflation and dangerously unstable stock markets…that’s right, it seems like hard times could be around the corner.
 

Whilst at the Supermarket today, however, I noticed a group of folk, for whom hard times have been a way of life for some time…pensioners. Now I am ashamed to say that I have never really noticed their plight before (we all tend to wander around in our own isolated worlds), but I was in the Café having a Christmas Dinner, when I noticed the fare that these old timers were dining upon. I’ll spare the detail, but all of a sudden, my delicious roast dinner tasted like ashes in my mouth and I lost interest in it altogether. It did make me realise though, that if these folk, who have had the benefit of the most fruitful years of the Welfare State, can end up like this…the future looks less than rosy for the likes of us.
 

Looking at an average pensioner of today’s income, I perceived three sources; savings, the State Pension and private pensions; I then contrasted it to how we might ourselves fare in the future…here are my findings:
 

Savings
There is little doubt that for the most part, pensioners of today, in their younger years, tended to be more frugal and save a higher proportion of their income than we do. The sad fact though, is that inflation and longer life expectancy have eaten away at these savings…for example, since the 1930’s the Pound has lost around 95% of its purchasing power.
 
These days, on average, our savings rates are close to nil. Added to that, we tend to be very free with our expenditure, to the point of accumulating substantial and long running debt. Many of us will reach retirement age with either little savings, or will be deep in debt.
 

The State Pension
Pensioners are paid from our National Insurance contributions. Many people imagine that their contributions go into some kind of ‘pot’ and when they retire, this ‘pot’ will be there to fund them…nothing could be further from the truth. The retired population is funded by the working population on a perpetual basis.
 

This has been fine for today’s pensioners…but what about us? Demographic projections indicate a good possibility that by the time we retire, there may be insufficient NI contributors to fund the retired population…in any case even if there is a State Pension…do you really want to rely on £140 per week max?
 

Private pensions
Once again the old timers have had the best years of private pensions…any pensions due for maturity from here on end will yield peanuts in comparison. The reasons are multiple, and I don’t want to bore everyone with detailed explanations of how pension funds work…but here are some hard general facts: 

• Most pensioners, assuming full contributions, may end up with an annual pension (taxable) of 25% to 30% of their working salary…work that out to see what that might mean to you!
• To be assured of a pension of £20K (taxable), you would need to have accumulated a pension pot of around £500,000…think about that…and these are old figures!

 

So where does that leave most of us? Depressed? Despondent? Not knowing what to do? Well let me offer a suggested solution…one increasingly used to great effect by the Americans.
 

Finding themselves in much the same situation as I have outlined above, retiring Americans are selling their homes, cashing everything in and emigrating. Were you to visit Costa Rica, Panama, Argentina, Brazil or Venezuela, you would find that increasingly huge swathes of properties are being snapped up by American retirees.
 

But why are they choosing this option?
 

Well, they have found that in these countries, their modest ‘nest eggs’ are actually worth a great deal…enough to buy a villa on the Caribbean coast and keep them in comfort for the rest of their lives. Indeed many of these countries have caught on to this new trend and are actively offering generous incentives to attract retirees.
 

Now, of course, this option might not be to everyone’s taste but ask yourself this: would you rather put up with our lousy weather on 25% of your current income…or worse…£140 a week…for the rest of your life?
 

And anyway…judging by the current rate of change…will there really be much left of our country that would be recognizable to stay here for?
 

 

 

 

Entry Filed under: Rants & Views