Wednesday wealth dilemma: We're all doomed to hard labour

by Andrew Morris on 17 February 2010  |  7 comments
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This week's Wednesday wealth dilemma is all about the huge challenge of building up enough income for a decent lifestyle in retirement.

I was going to write this week about how tough it must be to plan what to do in retirement after working all your life. But that will have to wait - the article and the retirement - after recently reading in the Daily Telegraph about a depressing report from Aviva, the insurers.

Golden years...or penny-pinching poverty?

The report talks about a generation facing poverty in retirement thanks to dwindling savings and pensions, combined with unpaid mortgages.

Aviva's figures show that, after paying bills, 20% of people between 55 and 64 will be left with just £40 a week to live on.

Aviva found this group on average would have less than £750 a month, out of which £490 would need to be splashed out on utility bills, transport, clothing, and housing. And 20% typically has just £8,593 in savings. Even worse, 40% admit they haven't managed to put aside any money at all on a regular basis.

Meanwhile, 20% still owes at least £75,000 on their mortgages, and only 76% own their homes outright. These ratios are much worse than a decade ago, and will presumably continue to deteriorate.

The retirement income squeeze

As if that's not bad enough, another study claims pension incomes have plunged 70% in a decade. Moneyfacts said that based on monthly contributions of £100 into a pension pot over 20 years, those retiring in January 2000 enjoyed an annual pension income of £9,000. That's fallen to a miserable £2,500 for those retiring today, having made exactly the same contributions, thanks to poorly performing markets and increasing longevity.

Ever felt like you're swimming against the tide?

Hi ho, hi ho......

So instead of retiring at 60 or 65 mortgage-free, with savings and healthy final-salary pensions, many of us are destined to work until we're really old. We've been caught in the perfect storm of stagnant stock markets, tumbling annuity rates and profligate governments. Our parents rarely bought things on the never-never and reaped the benefits; we've always always spent, spent, spent and will reap what we've sown... penury!

Annuity enigma

So we need to pay significantly more into pensions to try and secure the same level of income as just a decade ago. I don't know about you, but given the current prospects for developed stock markets and economies, combined with ever increasing longevity, I don't see annuity rates increasing any time soon. Far from it, further decreases would be my guess.

As I wrote here in an earlier post, the case for buying an annuity with pension savings is looking weaker and weaker in my opinion, especially with my own exit door marked Zurich, before all the marbles completely disappear.

For as long as the tax relief on pension contributions remain, I suppose it still makes sense to chuck some cash into this long term savings vehicle if you can. But probably only after you've maxed out your annual ISA allowance, given the poor annuity rate you're likely to get when eventually raiding your pension pot.

SIPPing into a coma

And if you still do believe in pensions, and are lucky enough to be able to make contributions to your fund, I'd definitely recommend a SIPP. These days, a SIPP will at least give you control and flexibility. But if you're a passive saver by nature, you'll probably have to start thinking about becoming more proactive in order to eke out every extra penny of income in retirement.

I recently took the view that, after surfing the 2009 stock market wave, the UK economy and stock markets face considerable headwinds, to say the least. So I've bitten the bullet and despite naturally leaning towards the passive option of leaving my SIPP funds in UK index trackers, I've diversified into a few other managed funds. I recognize the risks of putting chunks of my SIPP into emerging markets like Brazil, Russia, India and China, but have offset that by putting some into less risky balanced funds.

Time will tell how they all perform, and whether they create a few extra quid to do the lottery with in retirement. But somehow it just feels a little better to be making some decisions in the face of this relentless onslaught against our financial futures. But it's a bit like rearranging the deckchairs on the Titanic.

Always look on the bright side...

Imagine a world of balanced national budgets, healthy global economies, responsible bankers, healthy annuity rates and England winning the World Cup. OK, that's stretching the dream a little far, but maybe one day the next generation approaching retirement will be filled with a rosy glow of anticipation.

In the meantime, back in today's harsh reality, what are you doing to protect your current savings and to ensure you're as comfortable as Croesus in retirement?

Please comment below with any inspiration for lovemoney.com members, or ask specific questions on our great Q&A forum.

More positive thoughts on growing your wealth next week! 

The challenge of retirement is how to spend time without spending money (anon.)

 The small print

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