Our opinion

The problem with pensions and retirement planning is that most people don't become interested in them until they are close to retirement. By this time there is probably not a lot you can do about the situation. The sooner you are aware of your likely position at retirement the better and obviously the longer you have until retirement the more chance you have of providing a good pension for yourself and family.

The state pension is not an automatic right - you have to qualify for it. Even the maximum the state pension is worth less than 18% of average male earnings. The state pension is linked to inflation rather than earnings and as earnings inflation tends to outpace the RPI the state pension will fall further behind average earnings in the future. We estimate that the state pension will be worth around 10% of average earnings in 30 years time.

If you expect the state will provide a comfortable retirement for you think again. The Government has not got sufficient money to do so at present, and without some radical changes will never be able to do so.

Stakeholder pension schemes

Working Demographics

Life expectancy in the UK is currently around 75 years for men and 80 for women. This is likely to increase further in the future.

At the same time, people's working lives are becoming increasingly shorter. Higher education means that many do not start work until well into their twenties. Early retirement / redundancy has become increasingly common.

The notion of a job for life is gone forever. People now move employers on average every five years. A typical career now includes periods of unemployment, self employment, career breaks, career changes, redundancy and early retirement.

Unfortunately all these changes in working patterns do not bode well for a prosperous retirement. Final salary schemes are generally considered to be the best pensions available. The information available here shows that regularly changing employers when in a final salary scheme can become very costly.

Personal pensions and money purchase schemes should not be affected in the same way as final salary schemes with changing employment. However it is very important to check that your pension provider does not demand excessive charges if your circumstances change and you need to amend your pension accordingly.

Annuities

The biggest complaint we have with pensions is the requirement to purchase an annuity with the majority of your fund. This is a legal restriction and applies to personal pensions, stakeholder pensions, money purchase schemes and FS/AVCs. Escalating annuity rates are currently very low (less than 5% for a 60 year old). This means that a pension fund of £10,000 will buy you an annual income of less than £500. It is easy to see that a very large pension fund is required to make up an income which will be much above the poverty line.

We think this requirement to purchase an annuity is very unfair. It is currently forcing pensioners to buy a poor value product and accept a less comfortable retirement than they deserve or expect. This situation is not likely to change unless the law is changed, and the government are reluctant to do this.

There are various solutions to this:

One is to remove the compulsory purchase of annuities altogether and allow pensioners to spend or invest their savings as they see fit. It can easily be argued that people who have been sensible enough to have saved hard all their lives for their pensions are unlikely to be reckless if they allowed access to this money.

Another is to modify the requirement to purchase an annuity so that one only needs to be purchased to the value above which the pensioner would not quality for state benefits. Pensioners would not then become dependant on the state and they could invest more of their pension funds in better performing investments.