The real problem with pensions

One of the points being made is that the average public sector pension is \”only\” around £7,800 a year. That may not sound much, but it is hugely expensive. If you were to try to buy the equivalent in the annuity market, you would need to have a pension fund at retirement of more than £300,000, to cover yourself and your partner, which is what the public sector payment does.

Is simply that they\’re damned expensive.

Which means that someone, somewhere, has to pay lots and lots of money to secure them.

There is no way out of this: in order to fund that £7,800 a year pension, someone, somewhere, has to cough up £300,000. It might be in savings during working years, might be employer contributions (which are really the same thing), might be taxation on others, might be foregone consumption as the capital invested spins off interest and dividends.

But in order for one peep over there to get that £300 large some group of people, somewhere in time and somewhere in the economy, have to give up that £300 large.

And that is the pension problem: they\’re expensive.

9 thoughts on “The real problem with pensions”

  1. That is very expensive. Don’t some shares yield 3%?

    The other problem of course is that some people think that others should pay their pension via taxes.

  2. I saw a very pretty blonde teacher on the 11pm Sky news last night saying, ‘All we want is what we’ve put in.’

    Which made me both shout at the screen, ‘Yes, you can have it!’ and despair at the state of modern education.

    (It’s not the only thing which makes me despair at the state of modern education, of course.)

  3. Why does it cost £300,000 to get an annuity that pays £7,800? If you put it in a bank paying 1% a year and withdrew it at a rate of £8,000 a year that would last you 47 years. If we assume you want to inflation adjust it would still last you 38 years.

    Something to do with the partner?

    Tim adds: Yes.

  4. It never occurred to me that my partner would also get a pension. I’ve always assumed she’d fund her existence out of my wallet, as she’s always done.

  5. “It never occurred to me that my partner would also get a pension. ”

    Well it depends on what annuity you buy:

    1. Joint life (ie. paid until both of you die).
    2. Index-linked (ie uprated with RPI).
    3. Pseudo index-linked (eg RPI, capped at 5%)

    Right now, it’s much much much better to tell the annuity people to eff off and simply do income drawdown.

  6. Our financial adviser has advised us that a super fund of $3 million will give us an income of $150000 per year and when we shuffle off this mortal coil the $3 million goes to the kiddies (or the RSPCA or Greenpeace if we’ve suffered dementia before we snuff it), so 300k to buy 7800 sounds as if evil capitalists or, worse still, bankers are stealing some of the money.

  7. “But in order for one peep over there to get that £300 large some group of people, somewhere in time and somewhere in the economy, have to give up that £300 large.”

    So it IS a zero-sum game?

    (Just being mischievous 🙂

  8. Andrew…the income producers have to decide whether to pay wages or dividends…wages go to workers…dividends, eventually after various attenuations, accrue to pensioners…it’s your choice

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