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Well, yes, of course, lifetime income hypothesis

Millions of people have abandoned saving into pensions in the past year to bag an extra £550 or more in annual take-home pay to meet rising fuel and food bills.

The aim of pensions saving is to smooth lifetime income across lifetime expenses. Some portion of this year’s income is put aside to cover a year when not working.

So, real income changes this year – prices change relative to wages. The amount to be put by to smooth income from working years over non-working years changes.


5 thoughts on “Well, yes, of course, lifetime income hypothesis”

  1. “The aim of pensions saving is to smooth lifetime income across lifetime expenses.” Good point. I have heard people with government final salary pensions say that they feel better off in retirement than ever before. I suppose “feel” carries quite a burden there, but it does let me infer that their pensions are too damn big.

    Not mine, of course, quite a different case. Come to think of it there’s a natural test, at least for people who are old enough to have got the old-style State Retirement Pension i.e. old age pension. They had an attractive option of buying more by deferring drawing it. If they took that up I infer that they felt that their occupational or private pensions were too small for comfort. So: how many civil servants, schoolteachers, doctors and so on deferred their old age pensions? That might make an interesting research project for an economics student.

    Similarly, how many of them bought extra pension either by using AVCs or personal pensions. You’d have to allow for the effect of the Lifetime Allowance on the pensions of the highly paid, e.g. doctors, but it’s still an interesting question.

  2. If the young stop paying in, then the Ponzi scheme stops working. That’s the bigger worry. Even before the cost-of-living issues, the demographic headwinds were turning against the stock market.

  3. There used to be, around 2000 or so, a wee bit of a loophole on AVCs. I forget exactly how it worked, but something like getting the tax back at the highest rate on the whole AVC. Got closed fairly quickly.

  4. “If the young stop paying in, then the Ponzi scheme stops working.” Most of the young who are not government employees will be in Direct Contribution schemes. I don’t see how they can be Ponzi schemes.

  5. @ dearieme
    I deferred my state pension when I reached 65 because I was still working, but assumed that some reasonable time thereafter I should stop – hence that contributed to the smoothing effect.
    Most civil servants can and do retire and start drawing their pensions at or before state pension age (various classes of “public sector workers” e.g. police, fire, military, *must* retire and start drawing pensions before state pension age).
    So it’s a somewhat misleading comparison.
    The over-generosity of civil service/NHS/… pensions is a separate question

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