Avoiding the pensions trap

Avoiding the pensions trap

A few years ago it was a given that companies didn't want to hire older workers because youngsters were cheaper, better and available. Now, it turns out, according to the Office for National Statistics, that the number of pensioners working in Britain soared by 8.8% in the year to March.

This was the fastest growing group in the labour market, and the second strongest was people between 50 and retirement age. Meanwhile, declining fertility rates are reducing the numbers of youngsters coming into the labour market.

There is no reason – international recessions apart – why these trends should not continue. People approaching retirement age realise that they have a much longer life expectancy than they thought when they were young, which cannot be financed out of the pensions they have put away.

A recent study commissioned by Life Trust Insurance (which, of course, is in the business of selling policies) says that retirement will cost a typical couple £400,000 spread over 20 years. Poor pensioners are in a particularly bad position because the number living in poverty has risen for the first time in a decade, despite a government priority to reduce pensioner poverty.

The fact that this can happen when people at the top have been rewarding themselves with huge and continuous.....continued below

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That aside, the beginning of a solution to the problem may be in sight. If older people work longer they will pay more in taxes and spend money more in the shops, thereby expanding the economy by more than would otherwise have happened. If they also delay taking their pensions then the funding problem will at least be postponed.

The emergence of more older and fewer younger people in the workforce is not the only surprise in the pensions world. When I went from full-time working to a two-day week a couple of years ago, there was one thing that everyone agreed on: delay drawing down your pension until all your savings are exhausted for the blindingly obvious reasons that each year my "pot" of money in the company's scheme (a so-called "money purchase" one) would go up as it was all in cash, while at the same time – whisper it – I would have one less year to live.

What happened? My pension pot went up by around 6% to 7%. Yippee. But hang on, it turned out that the value of annuities (which you have to buy to provide annual income in retirement) actually went down by 12% so I was significantly worse off by deferring my pension. This was mainly due to actuaries suddenly realising that we are all going to live even longer than they thought.