Is Your Retirement at Risk?

According to the latest Pension Trends data from the Office for National Statistics, the total amount saved into pensions fell from £20.9 billion in 2007/8, to £18.7 billion in 2009/10.

On the surface, this may appear to be a worrying trend, and as such the Governments pension reforms, due to come into force in 2012 seem timely and prudent. Essentially every UK employer will have to provide a pension scheme for their employees and auto-enrol them in it, deducting a minimum contribution from their salary.

However, I see things rather differently.

In my opinion, saving into a traditional pension, intending that to be your only source of income in retirement is incredibly risky.

But unfortunately Government doesn’t think in the same way and so all employees are going to be forced to save in this way.

Sadly 99.9% of them will never understand just what a risk they are taking.

We often hear reports about stock market volatility – and therein lies the problem. With pension funds invested in stocks, shares and other paper assets, they are always at the mercy of the stock market – which is overwhelmingly influenced by sentiment over any ‘hard’ factors.

Add to this the fact that with a traditional pension you declare ‘game over’ at the point of retirement and you are at the mercy of time and timing.

A 63 year old Virgo, receiving his pension statement in July 2007 would have seen his fund riding at an all time high. Come his 65th birthday in September 2009 his pension fund would be worth less than half its 2007 value.

He’s gone from imagining how he’ll spend his retirement to wondering if he can afford to. If he retires, his pension pot buys him an annuity. That means his money is no longer invested – it’s just a pot that he’s drawing out of with nothing more going into it. He can never get a better pension.

He can only improve his finances by working or refinancing his home.

The stress of all this leads him to an early grave. His widow, in many cases, now only gets 60% of the pension. When she goes, so does the pension.

When you invest in stocks and shares, if the company goes bump you lose your investment. All you had was a piece of paper. When the company is no longer there – neither is your investment.

That’s why I don’t invest in stocks and shares – unless it’s a business which I have some influence over. Last time I looked, no matter how much I spend at M&S or Sainsburys or Royal Bank of Scotland, I don’t get much of a say in what they do next.

If I don’t have control or influence, then I am speculating rather than investing – yet this is what the Government is wanting the UK population to do.

They’ve made a mess of the state pension, now they want everyone to fend for themselves – but they are encouraging, or even forcing, people into a retirement plan that is based on an increasingly volatile stock market.

So while the news that people aren’t investing as much in pensions because of the recession seems like bad news, actually there could be a silver lining to that cloud.

I just hope that before they get the available funds to start investing again, they gain the financial intelligence that should be taught in schools, and realise that there are far less risky ways of building a retirement income.

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