This Is How You'll Rescue Your Retirement

Published in Investing on 22 May 2012

Pension projections are slumping. Yours doesn't have to.

Published on Monday, the annual Scottish Widows Pensions Report made gloomy reading. As I've written before, the combination of inadequate savings, poor investment returns and low annuity rates has resulted in millions of pension savers looking set for a penurious old age.

And looking at the report, it's difficult to trump the words of Toby Strauss, group director of insurance at Lloyds Banking Group (LSE: LLOY), which these days owns Scottish Widows:

"After years of blood, sweat and tears, the UK pensions market is about to reach its moment of truth. A stark difference remains between what people expect they need to save, and the reality which would secure a comfortable retirement."

Consumers' confidence that their pension will deliver that comfortable retirement has never been worse, he continues, and retirement savings have now hit a record low.

Nor is this mere idle rhetoric. Scottish Widows' annual report is reckoned to be the UK's most authoritative survey of consumers' preparation for retirement, and since 2005 the firm has surveyed and scrutinised the views of over 40,000 people.

Stark statistics

Let's briefly look at the picture uncovered by the survey:

  • Less than half of pension savers, just 46%, are putting aside enough for their retirement -- a number that's five percentage points down on last year, and a fall of eight percentage points from 2009.
  • Worryingly, over one in five of us are putting nothing aside for later life -- a proportion that has increased this year.
  • Despite retirement savings plummeting, the nation's aspirations for pension income has gone up. At age 70, we want to be living on £24,500 -- compared to £24,300 as a stated aspiration last year.
  • Based on this year's new low average savings levels, an average saver retiring at 65 would get just half the income that they feel they need, with an average pension pot of £150,000 giving an annual pension of £5,700 in today's terms.

Shocking, isn't it? And in my book, Tom McPhail, the ever-amiable head of pensions research at Hargreaves Lansdown (LSE: HL) summarises the situation quite nicely:

"The message that we should be putting in front of every adult of working age is that it pays to save, and that any delay just makes the hill steeper to climb."

Climbing that hill

So there we have it. Most people have inadequate retirement savings -- and the hill that they must climb to get to the point where a comfortable retirement looks assured is getting steeper with every passing year.

What to do? First, of course, get the basics right.

  • Save in tax-advantaged accounts -- a SIPP, stakeholder or ISA, as your individual circumstances and inclinations dictate.
  • Save regularly, top up when you can and increase your contributions as you get older.
  • Keep costs down by opting for low-cost wrappers, and avoiding investment products with high charges.

Power your portfolio

But more to the point -- in what assets, precisely, should you invest?

Conventional wisdom, for instance, speaks of splitting your investments between equities and gilts. Gilts? In today's world, as Fool writer Cliff D'Arcy wrote last week, gilt prices can only go one way.

Cash? Don't make me laugh. Property? Ditto.

Which leaves a portfolio of shares. And hopefully, bearing in mind the ever-steepening hill that you've got to climb in order to catch up, that portfolio will be packed with shares carefully chosen for their potential to outperform.

Pension picks

Here at The Motley Fool, you'll find lots of helpful advice in the articles that we publish every day, and on the discussion boards where investors share their ideas and insights.

But we also, from time to time, publish free reports -- and I think that two or three of our latest special reports are required reading for anyone looking to rescue their retirement.

Take, for instance, this special free report: "Ten Steps To Making A Million In The Market", which we'll immediately dispatch to your inbox.

Nervous about making your own investment decisions? Well, take a look at "8 Shares Held By Britain's Super‑Investor", which points to eight core holdings -- and three core sectors -- identified by FTSE-beating Neil Woodford, a genuine investment superstar.

Not quite sure how to buy and sell shares in the first place? Then let us send you -- free! -- "What Every New Investor Needs To Know".

Your retirement, in short, is down to you. Don't delay -- start rescuing it today.

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Further investment opportunities:

> Malcolm holds Shares in Lloyds Banking Group, but none of the other shares mentioned here. The Motley Fool owns shares in Hargreaves Lansdown.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

ANuvver 22 May 2012 , 8:49pm

Hmm. A distinct whiff of advertorial here, and I don't mean the Super Soaraway Fool stuff at the end. I really don't mind that - to educate, etc. Fine.

The pensions industry is fighting for its life, which might give even more grist to Cliff's gilt mill. Horta Osario would have flogged off the foxy hooded widow long ago if only someone were willing to buy.

I note there's another favourable mention for a SWIP product recently published elsewhere on these pages.

Never mind. It's been a lovely day.

BIACS 23 May 2012 , 4:37am

A bit more reasoned arguement on why cash and property are not looked on favourable by the writer would have been nice. I think we can all guess the arguments against cash but property is a bit more up for debate and it's hard to see why it should be dismissed with the statement "don't make me laugh". If the writer is meaning that the majority of people are already over-exposed to property due to the value of the house they live in (assuming they own it) then that's perhaps a valid point, but would be nice to know the reasons he feels it should be dismissed without a second thought. Low borrowing costs, record rental demand and yields and the strong potential for generalised inflation on the horizon (which should, if it came to pass, devalue real mortgage debt and simultaneously increase property prices) would be strong counter arguments for having at least some element of property in your portfolio. I'm avoiding gilts/bonds at the moment but am still retaining property exposure together with the equity investments. Even over the last 2 years with a huge stock market rally from the lows of 2008 the property investments are still beating the shares hands down thus far. It also seems emminently more likely to me over the coming few years that my rental income will continue than that we will get another 40% stock market rally from here as we had in the last two years... but who knows. I'm keeping both the shares and the property to keep things balanced in any event.

MDW1954 23 May 2012 , 12:43pm

Hello BIACS,

Here's that reasoned argument that you asked for. And it's this: for the average person in the street, struggling to put enough by for a pension, It's difficult to buy into property. They can't buy a house or shop outright to let out, so must either invest via a high-cost property fund, or plunge into mortgage-based BTL with its attendant voids and risks -- if they've got a big enough deposit, that is. Being a landlord is great if that's what you want to do, but it's not necessarily an ideal strategy for the typical person in the street who just wants a pension at 65 or whatever.

Malcolm (author)
Malcolm (author)

MDW1954 23 May 2012 , 12:45pm

Hello ANuvver,

Not quite sure what you're complaining about? There was no intention of promoting SW products, and I don't think the piece actually does so.


Malcolm (author)

newtona2 23 May 2012 , 1:27pm

Cash would have served most people better than the stock market over the last 12 years, especially if saved in ISAs, Index Linked Savings, and/or in longer term access accounts. I bet people would have slept better at night too. For sure cash would have beaten almost all managed funds of the type that most (non Fool) savers would use, from the same insurance companies mentioned above.

Aside from that, I think the fundamental problem facing the pensions industry, government and savers is that a vast majority of the general public (again, perhaps not the Fools):
a) don't understand pensions
b) don't trust the governments of the future not to change the rules
c) don't see the point in saving as the returns are taxed after the tax they've already paid on the earnings, either now or when the pension pays out
d) many just feel that if you have nothing the government will look after you, but if you'd saved anything it will all be taken away. Even on these hallowed boards I regularly see posts advising people not to save too much or they'll lose benefits (mainly on the debt boards, to be fair!).
e) if they do understand pensions most people know they will get screwed by charges and possibly poor annuity rates at the end.

So who would want to save for retirement in this way?

If the industry and the government want people to save more they need to:
- reduce charges enormously
- increase tax free savings limits
- stop changing the bloody rules


BrnzDrgn 24 May 2012 , 12:31pm

If your buying into property do it the sensible way. Buy a home. When you have paid for the home and have done it up well enough to rent out then look for your next property and rent out your old one.

Otherwise do like some of the people I went to school with, you start your own cafe and get the taking up and get a customer base, then use the money from that to buy property outright and take all the tax breaks you can lay your hands on.

5753225 24 May 2012 , 12:35pm

"■Worryingly, over one in five of us are putting nothing aside for later life -- a proportion that has increased this year"

Thanks to Gordon Brown and his means tested benefits, there was no rational reason for the poor to save for their old age. So for 13 years they didn't. Now they can't afford to.
The man also destroyed the pension system.
What say you that he planned the impoverishment of the aged?

TheDemocrat 24 May 2012 , 12:41pm

Newtona2 - quite agree. The next generation of pensioners (now in their 40s and 50s) are heading for the cliff edge. Those that have houses mortgage free may be able to trade down (if the market hasn't collapsed) and an increasing percentage of pensioners wil be relying on Pension Credit or the new equivalent. Who would like to bet that HMT won't run out of NI contributions?

BTW the pernicious removal of the age allowance which has served us well since the 1920s must be restored. Dragging pensioners on 11K a year into the tax bracket is plain stupid!

PoorTeacherB4 24 May 2012 , 1:20pm

My other half (65 in July) is currently trying to make decisions about what to do with his (very limited) pension pot. It seems impossible to get disinterested, impartial information anywhere, and all he can see for certain is that all annuities look like a complete swindle. Oh, and the amount you are allowed to take as a lump sum seems to dropped massively since the last letter from Scottish Widows!

We own our house outright, and hope to be able to sell it and trade down when I retire in a couple of years' time, by which time the situation will certainly have changed, but not necessarily for the better. Where can people in our situation (which must be many thousands) get helpful guidance?

theoldone1 24 May 2012 , 3:12pm

Here's to Tony-boy do I agree with you!!!

I'd be very cautious about houses, as no one knowes where these are going in terms of price and when you come to sell so will all other people, so maybe as a minor tactic and if you've got the good luck to ride the waves.

Having been sold Endowment Policies, because the're flexible and nudge nudge you'll have something left over, missold pensions, been advised to put an indexed linked pension with a large utitlity in to Scottish Equitable (no reason but a good bonus for the IFA), there's no one you can trust whose title includes finance somewhere. There's two things in life you can't delegate and money is one of them.

Don't expect the politicians or the enforcement authorities to help you either, the politicians have been bought off (have their own scheme which peasants like us don't get to share) and the enforcement authroities are subject to political control (where they aren't underfunded).

My own take on this is a mixture of approaches depending on your own risk appetitie. Suggest shares in an isa's with good dividend payments thinking RDSB, RB, GSK etc, etc. Maybe a SIPP but bear in mind that the Government can and will change the rules.

I guess the watchword is keep as flexible as possible and trust no one other than yourself, and even then, get a second opinion.


The oldone1

sippquixote 24 May 2012 , 3:52pm

Dear PoorTeacherB4,
Your other half could delay taking his State Pension, preferably until near your retirement.
The State Pension increases by 1% every five weeks that you don't take it (that is, 10.4% a year) so two years delay will add a goodly amount to his State Pension. If necessary he can use some of his savings to support himself during those two years as he certainly won't be getting 10.4% per annum on his investments.
Be sensible: if he is in poor health, or not expecting to survive a long time, then it is better if he takes his State pension as soon as possible--you have to take a very cool, unemotional look at his long term prospects.

eccyman 24 May 2012 , 4:33pm

"At age 70, we want to be living on £24,500 -- compared to £24,300 as a stated aspiration last year"

That's about average wage. Plus in retirement -

1) You don't pay NI
2) Mortgage should be cleared
3) You've no work costs such as commuting
4) Pensioner benefits such a bus pass and gym discounts

I think most of us could retire on less than that - I'd be comfortable on less, around £18,000 would get me buy

ArkWelder 25 May 2012 , 12:23am

Conventional wisdom suggests equities and bonds. And gilts are only a small selection of the types of bond available. But then, slating gilts is easier to put across.

ANuvver 25 May 2012 , 2:03am

Malcolm - sorry, but I find it hard to be objective where SW are concerned. You reference their report (via Lloyds), which is why I brought it up here.

Interesting thinkpiece in today's FT exploring cynical governmental regulatory manipulation of institutions into the credit markets for deleveraging purposes, and a potential redefinition of capitalism away from the equity finance model for the foreseeable future. Uncomfortable reading for Fools, but we should all read things that make us uncomfortable, shouldn't we?

polonium210 25 May 2012 , 2:13am

Now try doing the sums form my side. I am 52 (so I can't touch my pension pots yet) but have been prematurely "retired" via redundancy as a direct result of Government economic policy (I worked for a private firm on Government contracts). So I have dropped from the higher-rate tax band to non-taxpayer status.

Now how am I supposed to save for my retirement out of my JSA?

matchmade 25 May 2012 , 10:37am

The endless message is save, save, save, but the vast majority of people in their 40s and 50s have enough problems just paying the interest on the mortgage and paying the mortgage down. Until your mortgage has been paid off, there is no point in putting even more into your pension than you are forced to by your employer and your NI contributions.

£24,500 a year for a pension is a ridiculously large amount and I have to question the sampling method. Most people with parents who are retired must know that they are on nothing like that kind of money. I will be quite content when I retire from self-employment in 18 years time aged 67 if I have £14,000 a year in real terms, provided I've paid off my mortgage and have about £50-100K in cash savings to spend on holidays and other capital expenditure. £5500 of that will be the basic state pension, I have about £3,500 already accrued in company pensions, so I only need enough in my private pension for another £5000.

However I'm seriously debating whether it's worth saving any more in my private pension: the annuity rates are pathetic - barely 3% for a man if you want to index-link it and allow your wife to inherit the pension when you die. Buying a rental property for cash seems like a better bet to me: an average of 6% gross return, effectively index-linked as rents tend to rise with earnings, and the prospect of capital growth as well.

coleyfish 25 May 2012 , 1:02pm

Ha ha ha

The only advertorial is for the Fool - how interesting that the author really thought he could get away with pretending he thought it was for the Scot Widows.

By the way author, why do you and others continue to pretend that you have to buy an annuity?

Just another shameless article aimed at pushing the product rather than the sensible strategy.


snikmij 25 May 2012 , 3:19pm

Doesn't it depend on what value the assets are at time of retirement?

Did some reading on the Mark to Market valuation which I found intriguing. If assets are priced at certain dates then forecasting can be tricky depending on certain variables used.

The other way is to invest in companies that have products that at least keep up to date with inflation, such as utilities, food growers/suppliers.

Admittedly one has to hope there still be around in the years to come but there's at least a good possibility that they will.

ArkWelder 25 May 2012 , 4:38pm


Annuity rates might not be at their best now, but will they still be that way in 18 years time? There are also fixed-term and enhanced annuities to consider. And as coleyfish is suggesting, drawdown options are available as alternatives to annuities. Worth keeping in mind before making a final decision.

Is self-employment via a Ltd Co.? if so, then employer and employee national insurance deductions can be reduced if the company pays into the pension fund for you.

MDW1954 26 May 2012 , 12:15pm

Hello Coleyfish,

If you read what I wrote in the comment, instead of what you think I wrote, you'll see that I wasn't promoting SW products at all!

As for encouraging people to read TMF's FREE reports, what's wrong with that? What have they got to lose, except maybe the time -- ten minutes or so -- invested in reading them?

I'm sorry you find that "shameless".

Foolish regards,

Malcolm (author)

RobinnBanks 03 Jun 2012 , 12:03am

Doctors are strking because they will only get £50k pension and a £100k lump sum if the changes are imposed; but they will still expect their bin emptied by someone earning half this for a year's full-time work, who will retire on £140 a week, or £7280 p.a. Most people do not save enough into a pension because they cannot afford to!
Bankers and some company directors get more in a year than the average person earns in a lifetime. Footballers, film, tv and popstars are rolling in cash for playing games; while politicians screw as much out of us as possible in expenses. It's time it was stopped, but who will stop it? Not the politicians, nor any of these other grossly overpaid people. Inequality rules in the UK!

RobinnBanks 03 Jun 2012 , 2:46pm

I forgot the Lawyers, Barristers, Judges all on colossal pay, so that normal people dare not take a case to court because ot the £millions of costs, damages etc. So, only the rich get justice, or win, as the case may be.

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