This is the first part in a series on saving for retirement that will conclude with some positive steps you can take to defend against future shocks to your retirement plans.
My editor said recently that he learned even young people have no confidence in pensions. I don't blame them. Things have gone too badly wrong, too often.
This week I'm going to write the part that stuns you about what's gone wrong before with millions of peoples' retirement plans. In part two I'll write the part that frightens you about what might go wrong in future. And in part three I'll write how you can more-or-less eliminate that fear without sniffing glue, or without throwing huge amounts of money at the problem (which is what the pension industry would have you do).
There are many things that might go wrong with your pension plans...
What's gone wrong before?
Quite a lot has gone wrong for us before regarding our retirement plans. These things have affected every one of us in a serious way, and millions in a catastrophic way. Here are some examples, just looking at more recent history:
No protection after pension funds collapse
140,000 people were members of final-salary pension schemes that went bust in between 1997 and 2005. `Final salary' means that you're promised by your employer to receive a percentage of your salary (usually half or two-thirds) every year when you retire. These people had been given government promises that they would be protected, but it's only last year that they started to receive anything that is even close to decent compensation.*
State pension linked to inflation instead of earnings
Part of the state pension used to rise in line with workers' earnings, but it was changed to rise in line with the Government's measure of inflation. (Inflation is the rising price of goods and services we buy. The `Government's measure of inflation' is half that by some other measures, plus inflation on things pensioners buy has been significantly higher even than the average inflation rate!)
The problem is that inflation tends to rise a little slower than earnings. What's more, `a little slower' in percentage terms means a big difference in pound terms. In the decade following the change pensioners had become tens of pounds per week worse off.
The government has stated it intends to reintroduce the link, but will it happen? And even if it does, it'll still be too late for those who lost out.
Abolishing tax relief
A simple footnote in a budget removed `advance corporation tax relief', which provided an extra £5bn a year to occupational pensions. With compounding, this could easily be more than £100bn lost in just over ten years.
Equitable Life
Crazy promises to investors ruined Equitable Life in 1999 and 2000. This affected more than one million people, many of whom suffered devastating consequences on their retirement plans, with their pots almost halving in value. The government must take some of the blame because it convinced people that investments at Equitable were safer than they really were.
Although we've seen some progress this week, finally, on getting at least some compensation for some of the victims, it's been a long time coming, and we still don't know for sure if victims will get anything. Nor do we know exactly how much compensation they'll get, who (out of those still alive) will get it, or when they'll get it. A very sad story this has been.
Fallen annuity rates
An annuity is a pension income that you get in return for selling your retirement savings. You might sell your pot of, say, £100,000, and get a guaranteed income till you die of 6%, which is £6,000pa.
Annuity rates have dropped from around 9% of your retirement pot per year to 6% in the past ten years. That's a bad combination with an average 10 years of no capital gains in the stock market.
Worse still, at the beginning of the `90s annuity rates were 15%. Anyone retiring now who had been counting on getting an annuity to pay their bills may be rather distressed by the deterioration they've seen over the years.
This is just a handful of things that have gone wrong over the past 20 years, but what about in the future? Watch out for part two, which will be called 'The Many Risks To Your Retirement Plans.' It's about what could go wrong in the next 20 years, or even 40. Part three, 'Shock Proofing Your Retirement Plans,' will be about what you can do to reduce these risks.