Avoiding the Pensions Trap

No one has ever claimed that growing old is easy, but these days you almost need a life coach to keep track of the changes that are confounding expectations.

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 labor 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 labor market.

There is no reason – international recessions apart – why these trends should not continue. People approaching retirement age realize 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 pay increases, even when they have failed, is a blot on a civilized society that must be eradicated.

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 realizing that we are all going to live even longer than they thought.

There was only one thing to do: grin and bear it in the hope that things couldn't get worse. Then along came the global credit crunch and I decided the only solution was to stop reading about pensions in the paper. Which I did until my eyes fell on a story in the Guardian saying that pension annuities had reached a five-year high. The main reason was a jump in interest rates on corporate bonds caused by the crisis. A male worker retiring recently at 65 with a pension pot of £100,000 pounds saw the income he would get from it rise by 11% to £7,660 a year compared with March 2006. It is an ill wind that blows no one any good.

This has led some pensions experts to say that those who have been hanging on should take their pensions now before fresh longevity calculations induce another downturn in annuities.

Whatever else - and despite all the justified criticism – this may turn out to be something of a golden age for pensions. Current company pensions reflect the fruits of an era of full(ish) employment, strong growth, an inflated housing market and a relatively buoyant stock market. For the younger generation emerging from university with high debts and unable even to get on to the first rung of the housing ladder, provision for pensions must seem a remote priority.

Which is a good reason for taking the provision of pensions, state and private, out of party politics. Although pensions are a talking point as never before, we have yet to have a national debate about whether people should be forced to save (through higher taxes) if they are not providing enough by themselves. It cannot be postponed forever.