Pension provision is an impending disaster we need to prepare for
PUBLISHED: 16:32 21 February 2020 | UPDATED: 16:33 21 February 2020
As is the case with flooding, action needs to be taken on pensions to avoid a national catastrophe, says finance expert Peter Sharkey.
Nightly television reports on the devastation wreaked by the latest nationwide flooding make for distressing viewing.
Thousands of people have lost everything (one poor lady was swept to her death), their homes deluged by deep, filthy water which has submerged furniture, carpets and other household items, leaving a stinking trail of destruction and wreckage in its sizable wake.
Most consumable household items are replaceable, but what of personal effects and memories, now tainted or lost, which are impossible to restore or reinstate?
In addition, one wonders how widespread flooding affects property values. Homes can be dried out, restored, redecorated and refurnished, but imagine having to go through all of this hard work accompanied by a constant, nagging feeling that there's a chance of the floods returning at some point. It is a truly horrible situation that many people find themselves in.
Can we solve the perennial problem of flooding? We can certainly try: how about dredging our rivers on a regular, rolling basis for a start?
We must surely consider where we build too. Not that long ago, planning permission was never granted for the erection of a permanent structure on a river's flood plain. Any form of structure capable of restricting the flow of water across a flood plain, even a temporary Portakabin, was prohibited. Today, entire housing estates are built on flood plains; regrettably, we now know what happens when they are.
Calls have been made to divert excess water from upstream of the choke points through large underground tunnels connected to the nearest estuary and while it's clear flood defences need to be strengthened, there is a compelling case for helping people affected by the devastation to get their lives back on track. We're one of the world's richest nations; we can afford to do this. No excuses.
Regrettably, it can sometimes take a disaster (and for the people affected by the floods, it is a disaster on an unprecedented scale) to effect much-needed change. Some of the ideas outlined above are easy and relatively inexpensive to implement; others will take significant investment, but there's no point simply hoping the floods won't return.
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The same is true of our personal finances. The disaster hasn't occurred yet, but we're currently trundling towards a potential calamity capable of dwarfing the havoc caused by widespread flooding because it will affect millions of people.
Nearly two years ago, the government's own advisers revealed the period of time we have remaining before the state pension pot runs dry. Most readers will be surprised to discover that this is not some remote point in the far-flung future when they're likely to be pushing up the daisies, but a mere 13 years away.
The seeds of this impending disaster were sown in 1948 when the nation's national insurance fund was introduced and from which the basic state pension has since been drawn. In other words, from day one, the fund has operated on a pay-as-you-go basis, much like a bank's current account. Initially, more money was paid into the fund than was disbursed as pensions, but this arrangement has changed dramatically in the intervening decades.
Back in 1948, average male life expectancy was 66; for females it was 71. Given that men retired at 65 and women's pensions were much lower than those of men, the operation of a pay-as-you-go pension system was considered the most natural thing in the world.
However, as living standards, the environment, housing, food, medical provision and education improved dramatically, life expectancy too began to rise. Nowadays, females can expect to live until they're 83; males to 79.
Today, therefore, we have a growing number of folks living much longer than anyone could have anticipated in 1948 and a falling number of workers making National Insurance Contributions (NIC). Meanwhile, we're paying pensions out of our permanently overdrawn "current account" which is having to be replenished every year to the maximum allowed by law, an arrangement that is unsustainable because the amount is capped.
It follows that to avoid a pensions disaster, we urgently need to make our own provision for the time when we retire because after 2033, unless the government takes radical action, the pay-as-you-go NIC fund runs dry.
Admittedly, workplace pensions have been hugely successful and the government deserves credit for introducing them, but ultimately they're likely to be the equivalent of a few sand bags trying to hold back the full force of a raging River Severn.
TAM Asset Management Ltd offer savers the opportunity to invest their savings in Investment ISA portfolios comprising a variety of different funds pursuing long-term cautious, balanced or adventurous strategies. For further details, please visit the MoneyMapp website.
For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.