Britain's massive pensions timebomb

by Ed Bowsher on 28 June 2009  |  9 comments
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The government faces a long-term pensions crisis.

Britain's pensions timebomb appears to be even more explosive than I had realised. S&P, the ratings agency, reportedly believes that a combination of rising pension bills and costs associated with the financial crisis means that the UK government's debt could rise to 200% of GDP.

The national debt last hit that kind of level in the immediate aftermath of the Second World War. Currently national debt is around 50% of GDP.

Admittedly, S&P doesn't expect debt to reach 200% until 2050, but it's still a shockingly high level and shows the scale of our looming pensions timebomb.

S&P isn't the only organisation highlighting the UK's pension problem this week. An organisation called the British-North American Committee will apparently say this week the government's unfunded public sector pension deficit amounts to £1,117bn or 20,000 per person in the UK. In other words, if the UK government meets all its obligations arising from public sector pension schemes, it will eventually have to find an extra £1,117bn at today's prices.

That's going to be a tall order. There are only three ways the government will be able to find the money:

- taxes go up

- other areas of public expenditure are cut

- The UK economy grows at a very fast lick for a long-time. That will give the government extra tax income for pension payments.

Of course, the government has one other option. That's to renege on its pension promise to public sector workers. Sadly, I fear that's inevitable.

We may also see cuts in the basic state pension and other government benefits for pensioners.

So it's a pretty gloomy picture. I think the only prudent approach is to assume that when it comes to your pension, you're on your own.

Trouble is, I think some people are pretty scared of the pensions issue. They may not understand the jargon, and they fear that they'll never be able to save enough.

But, in reality, pensions are simpler than you might think. And if you follow the right approach, you could build a bigger pension pot than you might have expected.

So to help you get on the right track with your pension, I'm going to write a series on my blog this week called: 'Become a pensions expert in five steps.' I hope you return here over the week and hopefully you'll no longer be terrified by the time the series finishes.

Check out more of my blog posts