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Saturday, 8 October 2011

The Pensions Disaster Intensifies

Newspapers have today emphasised the disastrous impact of the economic situation - and of 'quantitative easing' -on people who are close to retirement and who are in funded pension schemes [both the few remaining 'final salary' schemes and the now-predominant 'money purchase' schemes]. The headline figure is that the funds that retirees in the next few months will receive at least 30% income less, as compared to to someone who retired with the same amount of credit in their pension 'pot' just three years ago, in 2008 when the credit crunch became clearly discernible.
This alarming fact follows on from a decade during which the incomes receivable by retiring pensioners declined steeply. In 1997 the income receivable in a typical annuity for each £1,000 of assets held in the fund was £77.41.
After Gordon Brown's notorious 'raid' on pension funds, by which the tax advantages given to people who were providing for their old age [and to the payments-in made by employers who helped them to save by contributing to each individual's pension] were removed, the rate at which funds were added to each fund-member's 'pot' declined dramatically: so by 2000 it was very much harder to save each £1,000 - which only yielded £58.00 in pension. The decline in the yield per £1,000 was largely due to the fact that pension funds had been 'advised' to shift their assets from equities [shares in real-world companies] to bonds, especially including government bonds, which over subsequent years have produced much lower income yields than did equities.
The effect of 'quantitative easing' has been to reduce still further the income that is paid out per £1,000 on bonds. So pension funds can pay only reduced cash sums on retirement: after which the providers of annuities can only produce lower pensions than they previously did for each £1,000 that is used to purchase the annuity. There is no basis on which one can expect the situation to improve: so each pensionable person who comes to retirement will feel more comprehensively 'cheated' by the system. Saving will be seen to be decreasingly beneficial: and the children and grandchildren of the embittered pensioners will have a lifelong memory of this disaster.
Hence when politicians to urge people to be prudent and to save - and invest - this will seem hypocritical and hollow. The psychological impact of such aspects of the 'financial crisis' will be profound but unfathomable.

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