Defusing the bomb

At first sight, demographic predictions are alarming: there will soon be more old people than earners and taxpayers to support them. John Hancock looks at ways round the problem

The term "demographic time bomb" has become common currency in discussions related to pensions planning. It refers to the changes that are expected to take place within the UK population over the next 40 years. A declining birth rate and improved medical capabilities mean that pensioners, with their additional care costs, will represent an increasing proportion of the population.

As their numbers increase, pensioners will place a growing burden on the tax-paying - and shrinking - working population. The proportion of people in work is set to fall dramatically relative to the number of people in retirement, from 2.2 contributors per pensioner today, to 1.8 in 30 years' time. This is known as the dependency ratio. In effect, the argument runs, we will not be able to afford even the limited state pension now on offer to our elderly citizens.

It sounds horrific. However, as Corporal Jones was wont to say, don't panic. The UK population may be ageing but it is a slow process, so there will be time to defuse this time bomb.

Professor David Simpson, economic adviser to Standard Life, offers a less than apocalyptic view when he says that: "The dependency ratio is not going to detonate suddenly in the UK; it will decline at a slow and manageable rate until 2030, after which it will either level off or start to improve."

That said, the trend cannot be ignored. Concern focuses on that half of the 27.5 million working population who are not in occupational or other funded pension schemes. As things stand, their well-being in retirement will be the government's (read taxpayers') responsibility through the unfunded state benefits system, including Serps. And that will be the worry for any government - that the cost of paying pensions to an increasing third-age population may be an unacceptable burden for working tax payers and National Insurance contributors. Many future third-agers might be prepared to save into a funded pension scheme if:

l they could afford it;

l the scheme would be appropriate to their needs;

l administration costs would not eat up a large proportion of their savings.

It is partly the absence of these factors that dissuades many modest earners from saving for their retirement.

The first point might be covered by developing a second-tier pension scheme similar to the industry-wide schemes available in Australia. These schemes, essentially occupational schemes with wide access, offer to all Australians a funded (paid for by the beneficiaries, not the current working population) second-tier pension facility. The size of the scheme keeps costs down.

Affordability also has to take into account access to funds which, with pension funds, is difficult, in exchange for favourable tax treatment for contributions and investments; the saver forgoes access to the fund before retirement. This is believed to deter many modest earners who, even if they could afford savings, would be loth to invest in a fund which would effectively be closed until retirement.

While access to pension funds may not be ideal, if it encourages more people to save into funded schemes, it will help reduce the burden for future taxpayers. Also, the Labour Party is studying funded second-tier provision options industry wide - in Labour parlance of the day, this means stakeholder pensions. These should reduce costs.

For some, modest means are not the issue. There is no doubt that some comparatively affluent groups have the resources of fund pension provisions the equal of any working income. For instance, the post-war home ownership boom has left many people as beneficiaries of substantial capital legacies which could largely fund their retired life.

It is estimated that the current value of UK domestic residential property is pounds 1.2 thousand billion, while the total mortgage book for all lenders stands at about pounds 400bn. On the basis of those figures, there is some pounds 800bn of free equity currently available in the UK domestic property market.

Many will remember with concern the home equity plans of the late Eighties which saw some unfortunate pensioners risk losing their homes. However, lenders are back with new ideas, some of which should certainly permit the use of free equity without the twin concerns that the home-owner might be made homeless, or that their family would be denied any value on their death.

One such scheme has recently been launched by the Bank of Scotland. The Shared Appreciation Mortgage allows those in or near to retirement to utilise some of the equity in their homes to fund pension or long-term care arrangements.

The scheme offers a choice of two interest rates. With the first, borrowers pay a long-term fixed interest rate of 5.75 per cent (at time of writing). Borrowers on the second scheme pay 0 per cent interest. At death or surrender, the bank will receive the original amount lent plus a percentage of any capital appreciation since inception.

Where the 5.75 per cent rate is chosen, equity appreciation will be shared according to the original loan to value (LTV): 65 per cent LTV means that the bank will take just 65 per cent of any appreciation between inception and surrender. For borrowers selecting nil per cent interest, the bank's share of any appreciation will be three times LTV, so that 20 per cent LTV will mean the lender taking 60 per cent of any appreciation.

The government could also assist in the task of time bomb disposal. According to the National Association of Pension Funds: "The vast array of complex Inland Revenue regulations is totally unnecessary as only 1 per cent of individuals make full use of the tax system to benefit from a full pension."

NAPF also calls for an increase in personal contribution limits to occupational schemes, so that members (especially older ones, who have the resources and whose need is most imminent) have the same opportunities to invest in pension provision as do holders of personal pension schemes.

None of this means that the demographic time bomb does not exist. But it does mean that through greater legislative flexibility, administrative efficiency, innovative scheme design and releasing some of the large amount of free equity locked up in housing stock, it should be possible to defuse the bomb and ensure that we get past the peak of the problem in 2030 without mishapn

Ian Thorpe had Rio 2016 in his sights
Thiago Silva pulls Arjen Robben back to concede a penalty
world cup 2014Brazil 0 Netherlands 3: More misery for hosts as Dutch take third place
Tommy Ramone performing at The Old Waldorf Nightclub in 1978 in San Francisco, California.
peopleDrummer Tommy was last surviving member of seminal band
Life and Style
Swimsuit, £245, by Agent Provocateur

Diving in at the deep end is no excuse for shirking the style stakes

Life and Style
Several male celebrities have confessed to being on a diet, including, from left to right, Hugh Grant, Benedict Cumberbatch and Ryan Reynolds
life...and the weight loss industry is rubbing its hands in glee
Spectators photograph the Tour de France riders as they make their way through the Yorkshire countryside
voicesHoward Jacobson: Line the streets for a cycling race? You might just as well watch a swarm of wasps
Life and Style
lifeHere's one answer to an inquisitive Reddit user's question
Arts and Entertainment
'Eminem's recovery from substance abuse has made him a more potent performer, with physical charisma and energy he never had before'
arts + entsReview: Wembley Stadium ***
Joe Root and James Anderson celebrate their record-beaking partnership
cricketEngland's last-wicket stand against India rewrites the history books
peopleDave Legeno, the actor who played werewolf Fenrir Greyback in the Harry Potter films, has died
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Information Security Manager (ISO 27001, Accreditation, ITIL)

    £70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

    Biztalk - outstanding opportunity

    £75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

    Trade Desk Specialist (FIX, Linux, Windows, Network Security)

    £60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

    Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

    £35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

    Day In a Page

    A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

    A History of the First World War in 100 Moments

    Peace without magnanimity - the summit in a railway siding that ended the fighting
    Scottish independence: How the Commonwealth Games could swing the vote

    Scottish independence: How the Commonwealth Games could swing the vote

    In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
    Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

    A writer spends a night on the streets

    Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
    Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

    UK's railways are entering a new golden age

    New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
    Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

    Conchita becomes a 'bride' on Paris catwalk

    Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
    Pétanque World Championship in Marseilles hit by

    Pétanque 'world cup' hit by death threats

    This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
    Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

    Why did we stop eating whelks?

    Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
    10 best women's sunglasses

    In the shade: 10 best women's sunglasses

    From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
    Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

    World Cup final: Messi? Mascherano is key for Argentina...

    No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
    Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

    Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

    18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
    The true Gaza back-story that the Israelis aren’t telling this week

    The true Gaza back-story that the Israelis aren’t telling this week

    A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
    A History of the First World War in 100 Moments: The German people demand an end to the fighting

    A History of the First World War in 100 Moments

    The German people demand an end to the fighting
    New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

    New play reveals what Oscar Wilde said at trials

    For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
    Can scientists save the world's sea life from

    Can scientists save our sea life?

    By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
    Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

    Richard III review

    Martin Freeman’s psychotic monarch is big on mockery but wanting in malice