Pensions - the Good News and the Bad News

First the good news: Improved medical care and new drugs should ensure we will all live much longer than previous generations. The bad news? For the vast majority of people on the planet old age will come hand in hand with abject poverty.

Of course, a large proportion of the world's population is accustomed to living in poverty. But in developing countries, strong family support and tradition mean the old are taken care of by their children. This is not an option in the West where the elderly are more and more frequently shepherded into care homes. The cost? Upwards of GBP2,000 a month. Those who cannot afford such a bill can check into a staterun home for protection. I have seen some of these and while the staff does a valiant job, the conditions can be very Spartan.


Now we are coming to the bad news that is affecting not only Greece but the whole of Europe and global stock markets, not to mention the Indonesian Rupiah! Whilst the property market and creative investment products based on unrealistic property values were the root cause of misery in the US, in Greece it has been more the European culture of working practices and retirement laws that have crippled the country's finances. Only a massive bailout programme has helped it avoid bankruptcy; the burden on the working population has already led to large scale social unrest. Public employee salaries and pensions were among the first items to be slashed.

But the problems are not confined to Greece. The fear is that the contagion could spread to Spain, Portugal, Italy and Ireland, countries whose economies were flourishing up to two years ago. One of the problems of being a member of the Euro currency zone is that individual countries cannot adjust interest rates or print money to get out of a hole. The strains imposed by this economic straightjacket result in an inability to spend one's way out of trouble, and consequently, high unemployment. Unemployment rates are running as high as 20% in Spain with a reported 40% level affecting younger people. The UK is fortunate at this time because it has more flexibility to adjust but it is far from being free from problems. The hung parliament is going to make it even harder for the government to make unpopular, but necessary decisions. But at some point these decisions have to be made and among those to be hurt most will probably be pensioners. They are a soft target as they are less likely to mobilize themselves and cause mayhem in the streets. One solution to Britain's debt woes is quantitative easing. Economists love these words; in English it just means printing money. And in turn that means a dilution of the value of fixed incomes such as pensions.


All Western countries are faced with ageing populations. The great social benefit structures that emerged after the Second World War are crumbling. In the UK when people worked to 65 but lived to less than 70 the working population could comfortably support both pensioners and a national health service that was the envy of the world. Today the health service is creaking at the seams. Rumour has it that even abortion clinics have 10-month waiting lists! The government is increasingly pressing people to take responsibility for their pensions. The official retirement age is being increased in stages. Private companies that once had generous final salary-linked pensions have found that funding those schemes has driven them close to bankruptcy. Should those companies fail, their schemes would go into administration.


If you are in your sixties the chances are that an annuity will provide you with a regular income that is higher than you could expect from a conservative investment product. The problem is, the pension dies with you although it can be tailored to provide a reduced pension for the surviving spouse. But on the death of the latter it will most certainly cease. Other disadvantages of annuities include the gradual erosion of the fixed income as years go by. The purchasing value of a fixed pension could be a quarter of what it is today in 20 years' time. It would not be wise to depend solely on an annuity or fixed pension. A retirement armoury should have several types of assets and products.


Yes! The European Court of Human Rights has recently rejected an appeal from a group of British pensioners to force the government to increase state pensions of expatriates in line with UK inflation to bring them into line with pensioners resident in the UK and certain other countries. There are an estimated 500,000 UK retirees living abroad. There is no hope left that this position will ever be changed. This means if you are entitled to a UK state pension, when you receive it there will be no further increments if you choose to remain in Indonesia. You may not feel the immediate impact but consider the case of a pensioner who retired abroad in the 1970's. That pensioner is still receiving only 6 pounds per week, whilst the current pension is GBP 95.25. Further bad news is coming out regarding new interpretations on UK tax residency and domicile. Brits need to be aware that Her Majesty's Revenue and Customs are on the lookout for ways to bring in more money that is urgently needed to help pay the national debt and plug the budget deficit. Brits of course are not alone. Governments throughout the world are endeavouring to increase their revenues by whatever means possible.


For some, yes. For example, if you are British and don't need to draw your state pension immediately on reaching 65 you can delay taking it and in return it will be increased by 10.4% for every year you defer it. It sounds very generous but bear in mind actuaries will have calculated the increase in relation to expected life span. So if you live a long time you can be a winner. Die before you take it and the British Treasury wins!

There is one area where British expatriates can score heavily if they left behind one or more company pensions in the UK. This is thanks to QROPS (Qualifying Recognised Overseas Pension Schemes). The initiative actually came from the EU but to date only the UK has adopted it. Without going into too much detail, the schemes allow funds to be taken out of rigid defined benefit structures where the pension generally dies with the client or his surviving spouse and be placed into more flexible offshore structures where the investment can be passed on to one's estate on death. With the financial uncertainty affecting many company pension funds it is also a means of safeguarding one's future security. Guernsey seems to be emerging as the leading offshore jurisdiction for QROPS.

There is also good news for anyone with at least 20 years left before retirement. That good news is that you have time to accumulate wealth so you will not need to rely on faltering state schemes or bankrupt company pension funds. But it does mean addressing financial planning seriously and understanding the pros and cons of different assets and products.

And if you are single and have noone else to worry about you can aim for the perfect financial planning strategy and that is to save hard while you can, then spend your wealth frugally in retirement so that your money runs out on the day you die and the cheque to the undertaker bounces!