The retirement plans of millions of workers have been put in doubt by Britain’s growing pensions crisis, according to a series of authoritative reports.
The gulf between private sector pensions and the final salary schemes commonly enjoyed by public sector workers has reached record levels. But the chances of a worker in the private sector ever securing a generous final salary pension were fast diminishing, with nearly all employers now concluding that these schemes, which guaranteed the pension sum, were no longer sustainable.
The falling prices of shares and properties have severely dented the funds of the vast majority of those on the verge of retirement. Families were warned to brace themselves for disappointment when they received their pension payments as the sums they received failed to satisfy their expectations.
Britons cannot rely on the government to help provide their retirement benefits after the state pension was exposed as the least generous in the Western world.
Furthermore, an authoritative report from the House of Lords gave warning that the imminent increase in the highest rate of tax would also damage the pension savings of many families.
The difficulties facing most pension holders were laid bare by research from the insurer Prudential, which calculated that those with a defined contribution pension – which paid out depending on the amount paid in – would receive only a quarter of the retirement cash of those with final salary pensions.
If a 25-year-old worker joined a defined contribution pension – the kind used by most workers in the private sector – this year and paid in 2.7% of a lifetime average salary of £50,000 per year, while their employer paid in 6.5%, they would receive an annual pension of £16,023 from the age of 65.
A 25 year-old on the same pay joining a final salary scheme – most typically found in the public sector – could expect to receive £57,714.
The proportion of workers covered by a private sector final salary scheme nearly halved from 23% of the workforce in 1988 to 12% in 2003 as companies closed schemes. However, despite repeated government pledges to improve the affordability of pension arrangements, the majority of public sector schemes are still final salary.
A report from accountants PricewaterhouseCoopers found that 96% of companies considered final salary schemes to be ‘unsustainable’.
More than three quarters of employers gave warning that tax changes in the Budget had reduced their motivation to provide workplace pensions altogether, something echoed in a report from the House of Lords, which said a range of Budget reforms, including increasing taxes on richer pensioners, would drive money out of Britain.
Moreover, the value of pensions had been severely reduced by the financial crisis, according to a report from the Organisation for Economic Co-operation and Development. It said pension pots in Britain fell by 17.5 per cent last year alone.
With many households relying on property to act as a second pensions pot, the fall in house prices of almost a third over the past two years was likely to play havoc with retirement plans.
The OECD said Britain had the least generous state pension in the Western world, with the average worker receiving only 31 per cent final salary in state support on retirement – the worst pension gap in the developed world.
In another report, the Office for National Statistics said families on defined contribution schemes were likely to be disappointed with their pension savings. “Even if people with pensions do well ‘on average’, the system as a whole may fail to meet people’s expectations if significant numbers of individuals receive below-average pensions” it said.
The article raises some important issues and highlights the ever shifting burden of pensions responsibility – from State to companies – and onto individuals. To get someone on your side to help you successfully plan your retirement ‘pot’, just give us a call to get started.