Unfortunately, most of us still working today should not expect to have a retirement resembling our parents and grandparents, and the way pensions have shifted from defined benefit (DB) to defined contribution (DC) is a major factor.
The whole structure of retirement is creaking beneath the swelling numbers of older people who are now leaving work at the same time, and with many DC pensions paying out a pittance, we surely need an alternative.
Despite pensions underperforming for years, most people’s outlook has been slow to catch up and much of society still expects their pension to be their main source of retirement finance.
Many people approaching retirement wave off worries about dwindling pension pots with a, “It won’t happen to me”, attitude, but you only have to look at the figures to know this is far from true.
According to the Equity Release Council’s white paper, Equity Release Rebooted, the difference between payouts between DB & DC pensions is stark. The white paper warns that “DC pensioners with contributions of 8% throughout their working life can expect to retire with a pension of only 15% of their final salary – only one fifth of the pension of an identical worker in a DB scheme.”
This shift to DC has been happening over the last 25 years or so, but the real impact is being felt by the millions who are only now realising that they have not contributed enough to have the retirement they expected.
The obvious alternative
Today’s reality is that pensions will soon be just a part, rather than the sum, of retirees’ retirement finance plans.
The whole of society, including those whose job it is to advise people on their finances, must now realise that alternative retirement finance routes must be explored.
The obvious alternative is property. Most pensioners own their own home and billions, perhaps even trillions, is locked up in the bricks and mortar of their properties.
The white paper again offers great insight and proof that a switch to property makes perfect sense.
“With an average worker potentially repaying twice as much in mortgage capital each year as they save into their pension,” the paper continues, “it would be increasingly illogical to ignore the potential to unlock the wealth people have accumulated in their homes to help fund retirement.”
I couldn’t agree more. But now we have to convince the rest of society.