Staying afloat on golden pond

PENSIONS AND HEALTH CARE: As both the state and private sector reduce the security blanket, the onus is increasingly on us to ensure we provide for our support in later years. Here and on pages 12 and 13 we look at the problems facing those heading into r

OLD AGE has never been that much fun, and the way things are going the next generation of pensioners is going to find it even less so, as the holes in the safety net provided by the welfare state get bigger. A generation ago the average male retired at 65 and could expect to live just four more years in retirement. A generation hence, the average male will retire at 60 and expect to live a further 21 years. Millions more people will reach pensionable age over the next 35 years, but they will have to pay progressively more for medical care and nursing out of increasingly inadequate pensions.

The increasing demand of an ageing population for health care has already played a key part in driving up the cost of the National Health Service, although the perceived standards of service delivered have diminished. At the same time the Government has forced local authorities to take over the burden of supporting pensioners who can no longer look after themselves.

But local authorities are also strapped for cash, and many are insisting that those who have financial resources in excess of pounds 8,000 must hand over their assets when they go into care, including pensions and property which they had hoped to leave to their families.

Health-care insurance is available to pay for private care in the case of serious illnesses to which the elderly are prone, but it is not cheap and gets more expensive as you get older. Less than 20 per cent of the adult population has private health insurance, and over half of those who have are in subsidised group schemes sponsored by employers.

Among pensioners, the proportion with private health insurance falls to less than 10 per cent. Financial planning to cover the costs of long- term care is even less common, because most people took it for granted the community would shoulder the cost of nursing homes for all but the independently wealthy.

Meanwhile the demographic nightmare shows no sign of ending. The rising cost of paying pensions has already forced the Government to break the link between the state old-age pension and average earnings, and peg it instead to the cost of living, so that the old-age pension, now worth barely 15 per cent of average earnings, will diminish even further in relative value over the years as living standards for working people rise.

The State Earnings Related Pension (Serps) will pay a pension based on a quarter of the best 20 years of earnings between a minimum and maximum earnings band, currently between pounds 58 and pounds 440 a week. Anyone retiring in 1998 could expect around pounds 75 a week. But it too is being slimmed down to save money, and between 2000 and 2010 the formula will move towards a fifth of average lifetime earnings.

Despite this skimping, National Insurance contributions are no longer even paying the bills for existing pensions, and even after 20 years of North Sea oil revenues and privatisation proceeds, there is no fund to finance future payments. The Government has also changed the rules on pensions so that by 2010 women will have to work until 65 before they qualify.

The Government's preferred policy of transferring responsibility for pension provision from the state to the private sector is partly motivated by the desire to minimise the impact of pension bills for an ageing population on public sector spending and public sector borrowing. It also fulfills a commitment to promote business in the private sector.

But the private sector is unable to provide the certainty pensioners and those approaching retirement crave above all else. Companies traditionally pay pensions based on final salaries and length of service, so that after 40 years an employee could be certain of retiring on half-pay, or in the case of the most generous employers, such as the clearing banks and insurance companies, two-thirds of final salary.

However many employees find they have no choice in the matter. Companies increasingly make staff redundant and replace them with part-timers and temporary staff on short-term contracts, who are not eligible for the company pension scheme. The proportion of workers in company schemes actually peaked at 52 per cent as long ago as 1983, and has since drifted back to just under 50 per cent.

Personal portable pensions were designed to fill the gap, but have failed to do so convincingly, partly because the payments are based on investment performance, which cannot be guaranteed, and partly because millions of employees were seduced by a combination of commission-hungry pension salesmen and the offer of juicy rebates on NI contributions to opt out of company schemes and join private ones, to which employers are under no obligation to contribute.

The bad publicity has stiffened the natural disinclination of the young and even the middle-aged to provide for a future which might not happen. There are now around 20 million private pension policies, but many people have two or three, and no one seriously thinks the numbers or the contributions are enough to provide a comfortable old age.

The average employee in a portable pension now pays just more than pounds 50 a month, but the high cost of setting up a policy means that it may take three years before significant sums are actually invested in the pension fund.This has coincided with a fall in inflation which means pension fund managers have an uphill struggle earning the returns needed to provide an adequate pension.

There is a real risk that even over a working lifetime of 30 years, pounds 50 a month might well not be enough to provide an adequate pension. Most experts say employees should contribute 10 per cent of gross income for 30 years to have a real chance of retiring on half-pay, and it is possible an incoming Labour government could make that compulsory.

The problem becomes more complicated if, as appears likely, the current generation of employees has to change jobs several times and could spend longish periods - months, perhaps even years - between jobs.

Pension companies are much more flexible in allowing contributions holidays than they were even in 1988, when personal pensions came in with a bang. Legal & General, for example, allows a five-year holiday before declaring a pension plan paid up and ruling out further contributions. But it still pays to ask before taking out a pension policy, to make sure it is possible to stop, start, and vary contributions without penalty.

Last but not least of the problems is the pensions gap which is opening up visibly in front of millions of fiftysomethings who had expected to work until they were 65. A generation ago, 80 per cent of workers expected to work until they reached retirement age, but the proportion has dropped dramatically in the last decade to well under 50 per cent. Many employers have already culled staff 60 and over and are now pushing their over- 55s into premature retirement.

Most redundant employees get at least a brass handshake when they leave, but many redundant workers have found that it is difficult, if not impossible to get another job in their fifties. Even a year's money free of tax will not last long if it has to tide employees over for five or even 10 years before they can get a pension.

Inevitably early retirement reduces final salaries and length of service, leaving redundant employees a long wait for a reduced pension from both the company and the state.

Voices
Scotland's First Minister Alex Salmond delivers his speech at the Scottish National Party (SNP) Spring Conference in Aberdeen, Scotland April 12, 2014.
voices
Arts & Entertainment
Jessica Pare as Megan Draper and Jon Hamm as the troubled, melancholy Don Draper
tvAnd six other questions we hope Mad Men series seven will answer
Life & Style
The new low cost smartphone of Motorola, 'Motorola Moto G', is displayed in Sao Paulo, Brazil on November 13, 2013. The smartphone, with dimensions 65.9mm W x 129.9mm H x 6.0 - 11.6mm D is equipped with a Qualcomm Snapdragon 400 with quad-core 1,2 GHz CPU, a 4.5-inch display and Android Operating System 4.3 and a suggested price of $ 179 USD.
techData assessing smartphones has revealed tens of millions of phones are at risk of being harvested
News
David Beckham is planning to build a stadium in Miami’s port for a new football team he will own
news... in his fight for a football stadium in Miami's port area
VIDEO
News
weird newsMan live-photographs cracking of mysterious locked box on Reddit
Sport
Oliver Giroud kisses the Arsenal badge after giving the Gunners the lead
sportArsenal 3 West Ham 1: Two goals from the German striker and one piece of brilliance from Giroud puts the Gunners back above Everton
News
Plans to decriminalise non-payment of television licence fees would cost the BBC £500m according to estimates drawn up within the Corporation
people
News
weird news
Arts & Entertainment
Seeing red: James Dean with Sal Mineo in 'Rebel without a Cause'
filmAs 'Rebel without a Cause' is re-released, Geoffrey Macnab reveals how its star James Dean perfected his moody act
News
Obesity surgery in rats has been found to change the way the body processes alcohol
news
Arts & Entertainment
Heads up: Andy Scott's The Kelpies in Falkirk
artThe Kelpies are the latest addition to a growing army of giant sculptures. But naysayers are asking what a pair of gigantic horse heads tells us about Falkirk?
Life & Style
US Airways has been at the centre of a Twitter storm after it responded to customer complaints with a graphic sexual image
techUS Airways takes an interesting approach to customer service
Arts & Entertainment
Philip Arditti as Yossarian and Christopher Price as Milo Minderbinder in Northern Stage's 'Catch-22'
theatre
Arts & Entertainment
The Purple Wedding: Joffrey and Margaery Tyrell tie the knot
TV The second episode of the hit series featured a surprise for viewers
Life & Style
Back to nature: women with body issues have found naked yoga sessions therapeutic
lifeDoing poses in the altogether is already big in the US, and now it’s landed here – in mixed classes
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Management Consultancy - Operational Research Analysts

£35000 - £50000 per annum + Bonus + Benefits: Pro-Recruitment Group: You must ...

Corporate Actions Consultant - Market data, ISO15022, presales

£45000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: Corporate Acti...

Prudential Risk/Operational Risk Associate - London

£350 - £400 per day: Harrington Starr: An opportunity has arisen at a FCA regu...

PhD/MSc educated Operational Research Analysts - Consultancy!

£35000 - £50000 per annum + Bonus + Benefits: Pro-Recruitment Group: You must ...

Day In a Page

Homelessness: Why is the supported lodgings lifeline under threat?

Why is the supported lodgings lifeline under threat?

Zubairi Sentongo swapped poverty in Uganda for homelessness in Britain. But a YMCA scheme connected him with a couple offering warmth and shelter
A History of the First World War in 100 Moments: When the world’s biggest shed took over Regent’s Park

A History of the First World War in 100 Moments

When the world’s biggest shed took over Regent’s Park
The pain of IVF

The pain of IVF

As an Italian woman vows to keep the babies from someone else’s eggs, Julian Baggini ponders how the reality of childbirth is often messier than the natural ideal
Supersize art

Is big better? Britain's latest super-sized art

The Kelpies are the latest addition to a growing army of giant sculptures. But naysayers are asking what a pair of gigantic horse heads tells us about Falkirk?
James Dean: Back on the big screen

James Dean: Back on the big screen

As 'Rebel without a Cause' is re-released, Geoffrey Macnab reveals how its star perfected his moody act
Catch-22: How the cult classic was adapted for the stage

How a cult classic was adapted for the stage

More than half a century after it was published 'Catch-22' will make its British stage debut next week
10 best activity books for children

10 best activity books for children

Keep little ones busy this bank holiday with one of these creative, educational and fun books
Arsenal 3 West Ham United 1: Five things we learnt from the battle between the London sides

Five things we learnt from Arsenal's win over West Ham

Arsenal still in driving seat for Champions League spot and Carroll can make late charge into England’s World Cup squad
Copa del Rey final: Barcelona are paying for their complacency and not even victory over Real Madrid will put things right

Pete Jenson on the Copa del Rey final

Barcelona are paying for their complacency and not even victory over Real Madrid will put things right
Rafa to reign? Ten issues clay courts will serve up this season

Rafa to reign? Ten issues clay courts will serve up this season

With the tennis circus now rolling on to the slowest surface, Paul Newman highlights who'll be making the headlines – and why
Exclusive: NHS faces financial disaster in 2015 as politicians urged to find radical solution

NHS faces financial disaster in 2015

Politicians urged to find radical solution
Ukraine crisis: How spontaneous are the pro-Russian protests breaking out in Ukraine’s east?

Ukraine crisis

How spontaneous are the pro-Russian protests breaking out in Ukraine’s east?
A History of the First World War in 100 moments: The first execution at the Tower of London for 167 years

The first execution at the Tower of London for 167 years

A history of the First World War in 100 moments
Fires could turn Amazon rainforest into a desert as human activity and climate change threaten ‘lungs of the world’, says study

New threat to the Amazon rainforest:

Fires that scorch the ‘lungs of the Earth’
Liverpool, Chelsea and Manchester City: And the winner of this season’s Premier League title will be...

Who’s in box seat now? The winner of the title will be ...

Who is in best shape to take the Premier League prize?