Pensions

There are a number of problems with the pension system in the uk specifically, and europe generally.

Most of Europe have traditionally had a "social security" system providing a state pension. this relies on there being a lot of people of working age paying in, and a small number of people needing a small amount for a short period of time. People receiving a state pension get paid out of current contributions.

It became obvious in the early eighties that population demographics were changing, making this model of providing for the future completely impractical. When you have people working for fewer years, and living for more after retirement, you just can't do it.

A similar problem is hitting the "final salary" pension schemes as well. most companies are now closing these.

The outcome of this change in the ages of the population is that the state can't afford to provide for your future, so you have to do it yourself.

One of the methods is to invest in a personal pension scheme (or company equivelent). However these have had the problem of being sold badly giving unrealistic impressions of what the returns would be.

Company pension schemes have the additional problem that if the company goes bust, it can often take the pensions with it, making them worth significantly less. In addition, most company schemes are under funded which causes it's own problems.

To get a realistic return from a company or personal pension, you want to be putting between 15 and 30 percent of your income into it. This is nearly impossible for low income individuals and families. Also there are problems with the way your fund in handled when you retire.

The government is currently getting in a fuss because the level of pension provision in this country is massively too low, and the govenment can't afford to make up the shortfall.

However a lot of people are not using these methods of providing for their future, and are doing something different instead.

One alternative that a lot of people use is to keep upgrading the house until you retire, and then sell it and move to a smaller one somewhere cheaper. This has the problem that the property market has negative equity problems (worth less than you paid) in some areas, and thus you can be left out of pocket.

Other people go into business, with the intention of selling it off when they decide to retire and using that profit to generate income for your retirement. As this often has a property component it has some of the same problems as just investing in property.

Being in business is also not a safe option, because health problems can kill your business very quickly.

The final method I know of is to just keep putting more money into the bank, and only spend the interest. The problem with this is that the interest tends to be fairly low, so the amounts needed to give a sufficient return are quite large. (five figures).

This also has problems with it.

Generally, there is no best method of providing for your future at the moment, but whatever method you choose you do need to invest a large fraction of your income to provide a good return in the future.

Note: I am not a pensions advisor, just someone who has learned a bit while looking at his own options. For more detailed advice, see the website of the pensions advisory service.

last modified 04:56 2006/04/25