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Some were born as World War II came to an end. Some were born after the Beatles enjoyed their first hit. You may be one of them. I certainly am. I refer to the baby boomers. A survey out last week shows why the retirement of this generation poses the single biggest danger to the UK economy.

According to the Institute of Fiscal Studies (IFS): “A third of those approaching retirement report finding it impossible even to hazard a guess as to how much income they will receive from their private pensions.”  And for those on defined contribution pensions the ratio is even lower.

The IFS survey also found that nearly 60 per cent of non-retired individuals aged between 50 and 64 reported that they had never given any thought to how many years of retirement they might need to finance. And among those who have thought about how long they will be retired, there appears to be a consistent underestimation. And finally, although annuity rates vary considerably across different providers at any point in time, 78 per cent of annuitants remained with their original pension provider between 2002–03 and 2010–11.

Personally, I think the changes to the rules governing the way in which IFAs will be remunerated are part of the problem. So IFAs will charge fees rather than take a commission. The change would make complete sense if it wasn’t for one fatal flaw. The fatal flaw is human nature. People tend to be optimistic. For example, studies show that most people who can drive think they are better drivers than the average. We regale at paying an IFA a fee because we kid ourselves. We convince ourselves that we can manage our own financial affairs. We can’t, or at least most of us don’t. But that’s human nature.

But, because of the control this generation has over everyone, the baby boomers are unique in history. The two world wars pulverised society, and as the baby boomers grew up they found they made up a higher proportion of the population than their parents, or indeed their grandparents ever did. Their influence was proportionately greater. In the 1960s, this generation enjoyed a cultural revolution. From the Beatles to sexual liberation, the baby boomers fashioned a world that was different.

And growing up as they did in a time of inflation and negative real interest rates, they discovered the joy of leverage, and fell for the idea that house prices only ever go up. Indeed, for several decades this was pretty much how it was. They also grew up when equities just kept rising.

But in 2012 this generation is largely ignorant of how much poverty awaits. The penny is slowly dropping that a home is not the guaranteed source of income it was once thought to be. I am not sure that it is generally recognised how important rising stock markets were to funding the retirement of the baby boomers’  parents.

But reality will eventually stare this generation in the face.

The baby boomers simply have to save more. As a result the UK savings ratio must rise.

A rising savings ratio will lead to downward pressure on demand, while internal inflationary pressure will be virtually non-existent. This means recession remains a permanent threat.

But a rise in savings is not a good development for UK plc unless those savings are used to fund a more entrepreneurial economy. But on an individual by individual basis, funding high entrepreneurial activities is seen as high risk, and an inappropriate use of money used to fund retirement.

Do you see the snag?

That is why the government has to get involved. Only the government can influence the big picture; can implement measures that take into account that that low risk savings represent a high risk for the economy, which in turn makes the savings themselves risky.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Showing 3 comments

  1. Michael

    if the inland revenue sent everyone a tax statement that showed how much tax they could have saved by paying into a pension, then surely that would help?

  2. Michael Baxter


    Fair point, but only if regulators stop forcing pension funds to put money into low risk assets


  3. Michael

    Surely the pension industry is faced with the same problem as the press? Regulation leads to political interference. And low risk assets are government bonds. And governments want to sell those bonds.

    Is there an answer to the desire for sensible regulation in the pension industry? Or…….
    ……Should everyone have a low cost SIPP? (That is what I recommend to my family). That removes the need for a pension regulator altogether and even allows investment into private companies (or so I understand). It brings pensions into the real world.

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