Just about everything that could have gone wrong with the UK pensions system has gone wrong over the past 20 years, and there is no end in sight.
The rot began with former Chancellor Gordon Brown’s infamous stealth tax raid on pensions in 1997 but really spread after the financial crisis.
If the blight continues unchecked it will undermine the entire pensions edifice, as well as destroying people’s faith in building their savings.
Central bank stimulus may have bailed out stock markets after the credit crunch but the long-term costs are becoming increasingly apparent, especially after August’s base rate cut.
Gilt yields have now fallen to a meagre 1.5%, according to new figures from Hargreaves Lansdown. This is 42% lower than one year ago, when gilts still yielded a heady 2.6%.
It is a fraction of the 8% yield 20 years ago and this has now driven the combined deficit of UK defined benefit schemes to £1 trillion, according to Hymans Robertson. More than 5,000 schemes may never now plug the gap.
Falling gilt yields have also hammered the returns on annuities. Today, a couple aged 65 who spent £100,000 on a joint life escalating annuity would get a miserly starting income of just £2,884 a year.
Faced with such a statistic, demand for income drawdown can only go in one direction – upwards.
The squeeze on incomes means that even those who are motivated to save in a pension may have less money in their pockets.
For those who have both spare money and the will to put it aside, cash is no longer an option.
Although some will be reluctant to move up the risk spectrum, others will accept they have little choice.
With the FTSE 100 heading towards 7000 they have a clear incentive to invest in stocks and shares, even though most realise that markets have long since parted company with economic reality after years of monetary easing.
A return of the bull runs of the 1980s and 1990s may revive some enthusiasm, but this is hard to imagine in today’s low inflation, low growth world.
Even those who do save must accept they will have to work for longer, as life expectancy and the state pension age continue to rise.
At the same time the pensions “triple-lock” is set to become an even greater burden on the taxpayer.
Introduced in 2010 to bolster dwindling pensioner purchasing power it already costs the nation an extra £6 billion a year, which the DWP forecasts will hit £45 billion by 2025/26.
New Prime Minister Theresa May is standing by the Tory manifesto pledge to maintain the triple-lock until 2020, but it will eventually have to go.
All this means is that everybody will have to save more for their retirement and IFAs are ready to help. The hope is that savers don’t simply collapse in despair at the scale of the task.
Source: IFA Shops