This is Money Blog

Retire at 70? No chance. Our unfixable demographic problem

This demograhic problem is really coming home to roost.

It's a pet subject of mine...

- Demographic investments - I'm loving the returns (Apr 2009)
- How baby boomers will extend the financial crisis (Jan 2009)
- Demographics make emerging markets a screaming buy (Jan 2009)
- Demographics to spark a shares slump next year (Dec 2007)
- Demographics will spark a 15-yr slump, starting with London house prices in 2008 (Mar 2002)

...so I thoroughly enjoy these spells when the issue of population surges up the news agenda, given it is possibly the biggest and most immediate challenge facing the developed world...

- FSA boss says work until you're 70 (Daily Mail)
- Special report on ageing populations (The Economist - front page)

The problem in a nutshell

The post-war baby booms in Western economies (1945 to 1965) mean that a huge bulge in the population is transfering from contributing to the economy to taking from the economy because they are:
- Less likely to pay tax
- Less likely to spend
- More likely to use costly public services
- Certain to draw a state pension increasing pressure on public finances
- Likely to draw on stretched company pension schemes, increasing pressure on company finances

All these factors are then amplified by increasing longevity - life expectancy when the full state pension was introduced in the 1940s was around the same as pensionable age. Now it's 77 for men, and increasing by two years every decade.

The crest of this population bulge hits retirement age next year (or four years ago for women).

Before I trigger the hate mail/comments, I entirely accept that this hard-working generation deserves a well-earned retirement. I'm simply laying out the harsh reality of the economic impact.

And the solutions?

- Dramatically increase the pensionable age
- Dramatically increase immigration (a younger population helps pay for the old)

The first option is now impossible. The older population bulge also have the most votes - so no government would dare force them to work signifcantly longer. The opportunity has been lost. So open the floodgates to immigration? Again, political suicide.

So that's it. Just grin and bear it. The Japanese, who hit their own demographic wall 20 years before us in 1989, seem to have come to terms with the fact they're not constantly getting richer. Now we need to make the same adjustment.

- Andrew Oxlade, Editor, This is Money

- www.twitter.com/aoxlade
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A 28% return and why I'm glad I invested in October

Six months on, my flutter on more exotic investment funds deserves a brief revisit.

The FTSE100 has bounced 12% from a low of 3512 in early March. So is the worst over?

The Daily Mail's Investment Extra added to the debate this week with some sound analysis.

I explained in early October 2008 why I was investing part of the cash in my Sipp. The Footsie is actually 12% lower than when I invested. But my investments were mainly outside the UK. The returns so far:
- J O Hambro Japan: Up 28%
- Jupiter Japan: Up 17%
- Jupiter Financial Opportunities: Up 13%
- Neptune Japan: Up 8% (Up 44% over six months)
- Invesco Perpetual Latin American: Up 3%

It's worth noting that a surge in the yen against sterling has helped boost returns. And there's always the investments that don't work out: my £1,000 in the New Star Heart of Africa is now worth around £500 in theory with the fund wound up due to the miserable failure of New Star Fund Management to carry on operating as a company. I'm yet to find out the final value. I still want to have a small amount of my stock market money invested in Africa - I just need to find a new way to invest.

These early-day returns are fairly meaningless given that I won't call on the money until retirement in 25 to 30 years - a luxury of time that many people don't have. For now the returns just help offset losses on my UK investments. It will be the long-term fortunes of these funds that counts.

Now, with the Isa deadline upon us (April 5) and after an appalling year for equities, the rationale for investing in shares has moved up the agenda. Our investment correspondent Philip Scott picked up on this in his blog in March. In America, the debate was captured in the debate between TV host Jon Stewart and CNBC's screaming share tipster Jim Cramer. See the video here...

My personal view is the stock markets of Western economies face a tough time regardless of the financial crisis: a pensions timebomb will create a massive drag. But other parts of the world may emerge strongly from the gloom. Picking those winners - and minimising the risk - is the trick.

I took solace after my October investment when billionaire Warren Buffett a week later wrote in the New York Times about why he was buying shares. Anthony Bolton, possibly the UK's most famous fund manager, made a similar rallying cry at the time.  Amid the plugging of his new book, he has repeated his bullish stance in numerous recent interviews [one with The Guardian].

Shares aren't dead, in my view, but finding the healthiest ones remains fraught with danger. I'm relying on balancing my portfolio by backing regions that I believe have better prospects. It's high risk but potentially high reward.

- Andrew Oxlade, Editor, This is Money

>> How to pick the best Isa

How the baby boom will stoke the financial crisis

The flames of the economic crisis don't need fanning. But some basic demographic facts mean the blaze will be stoked for at least 15 years.

Fact: Post-war baby boomers (1945-1965) have begun to reach retirement. There was an initial spike in 1946 but the peak of the boom was around 1964 (see below).

Another fact: Male life expectancy has risen from a little more than 70 in 1980 to 77, and is expected to keep improving.

And one more: Average growth in the population aged over state pensionable age between 1981 to 2007 was less than 1% per year. Between 2006 and 2007 the growth rate was nearly 2%.
Source: ONS

The first male baby boomers will reach pensionable age in 2010. Millions of men and women in their fifties will soon move from their earning and spending peaks to earning nothing and spending far less. They will then claw back their hard-earned taxes through state pensions.

Because of rapidly rising longevity, they will be doing all this for far longer than the generation before. 

And another thing - a nascent recovery in fertility rates since 2000 will mean higher education and child-related state benefits.

Proportionally, there will also be fewer earners paying tax while there will be bigger costs related to an ageing population, such as healthcare.

The multi-billion burden of bank bailouts, mortgage protection schemes and VAT cuts, will seem like a squall compared to the perfect storm demographics will create.

In 2002, I wrote of a theory that predicted a property and stock market collapse would begin in Western economies, such as the US and UK, in 2008. It was based on demographics. It suggests that emerging markets, helped by younger demographics, will flourish. I will revisit the theory in the next few weeks, and look at where else UK investors should spread their money. I have shifted some of my investments into Latin America and Japan, for instance. (More on emerging market prospects)

The demographic timebomb should have been tackled in the Eighties and Nineties. Governments, with a five-year electoral time horizon, failed to do so. Labour has actually exacerbated the problem with massive State jobs expansion, which come with expensive final salary pensions. The future liability of these pensions do not even feature in current public finances. It would be illegal for a company to do that.

Labour has pushed through plans to raise the state pension age to 68, between 2024 and 2046. But it's a bit like tackling a blazing building with a water pistol.

The opportunity was missed to introduce solutions that would make an impact on the problem. Politicians will now be falling over themselves to keep happy the UK's biggest largest demographic - the over-60s.

Generations X and Y will pay higher taxes and might see a long-term fall in living standards. This financial storm is just beginning. 

- Andrew Oxlade, Editor, This is Money

Don't miss
- A summary of the financial crisis so far
- A summary of the stock market crash so far
- Beware all predictions and theories (including mine)

Money for nothing

Picture this if you will. You go to the supermarket to buy your weekly groceries. You look at the receipt when you get home and find that a number of items have been added to the list.
You wouldn't be a happy bunny would you? Well this is exactly what us happening to countless savers when they retire and decide to buy an annuity.

Several major insurance companies, Standard Life and Axa included, will charge you for  financial advice even when you don't receive any.

So, while you may not have heard a peep from your  adviser for 20 years, they'll still get a chunk of your pension. Galling - isn't it?

Absurdly generous contracts signed between the firm and the adviser when they set up the  pension ensure they get a slice  (usually between 1-1.5%) of your pension pot as commission whether they do any work or not.

So if you're pension pot is worth £100,000, then - as long as they're still trading - your long lost IFA could pocket up to £1,500. Not bad work if you can get it.

Some firms say they will drop the charges if you tell them that the IFA hasn't given you any advice. But given the vast majority of people won't have a clue they're being charged in the first place, this is hardly likely.

At best, these contracts were based on the hopelessly outdated, naive assumption that the adviser would continue to provide ongoing advice to the saver and would help them find the best annuity when they retired.

At worst, they are examples of how pension firms used attractive commission payments to encourage advisers to sell their pension rather than someone else's. (As well as an initial commission, advisers would typically have been paid renewal commission and annuity commission).

Thankfully,  Scottish Life and L&G say they have nipped these automatic payments in the bud but they explain they still have to honour older contracts with advisers. So those who set up pensions with them more than four or five years ago will still have this money automatically deducted from their pension.

Meanwhile Axa has now pledged to  end these automatic payments and Standard Life says it is reviewing its policy.

This is all just indicative of the wider problems that face savers when the retire and want to draw a pension.

Six in ten savers automatically roll over into their existing pension provider's annuity rather than shop around for the best rate. By doing so they stand to lose thousands of pounds over the course of their retirement. When you consider that almost a million savers are set to buy an annuity next year, that's a lot of money down the drain. Much of the blame has to be pinned on pension firms, many of which have been keeping savers in the dark about their right to shop around.

Four in ten firms are failing to spell out clearly the advantages of shopping around to savers approaching retirement, according to a damning report published earlier this year by the Financial Services Authority. The same report found that six in ten savers suffered delays when switching their pension to another firm.

At Money Mail we receive numerous complaints from readers who have been left waiting months to start receiving their pension.

There are, however, encouraging signs that the pensions industry - spearheaded by its trade body the Association of British Insurers - is finally getting its act together. It has produced a standard letter to inform savers more clearly about their options and has embarked on a project designed to speed up pension transfers for those that do find a better annuity rate elsewhere.

Savers everywhere will have to keep their fingers crossed.

Make sure you get the best annuity rate with our annuities finder.

Web week: We're now all losers in the crisis

Last week, the banking crisis deteriorated into an economic nightmare and the stock market went into meltdown. It has impacted the wealth of everyone.

Millions of personal pension holders now face a poorer retirement. Those five years from their carriage clocks are worst hit as their money is only shifted from shares to lower risk assets in the final years of the plan.

Meanwhile savers, shell-shocked by concerns about the safety of deposits, now face a spell of lower returns in the face of higher inflation -  the UK bank rate is now expected to fall as low as 2.5 per cent next year because of the slump.

And once again, there was bad news for homebuyers. New mortgage costs remain punishing despite the Government's gamble of a £500bn rescue package aimed at encouraging more inter-bank lending, which would make credit cheaper for consumers. It has so far failed. Higher future taxes are also likely to bankroll the bailout.

The only bright spot was plunging commodity prices - cheaper oil will eventually feed through to slower rises in the price of goods.

The outlook is the gloomiest in a generation. While consumers desperately search for reassurance about even Britain's biggest banks (see top stories below), they fear the worst - 65 per cent in a poll believe we're headed for a repeat of the 1930s Depression.

This financial shock is causing a shift in entrenched attitudes. Even Thatcher's economic legacy of deregulation, long popular on our online forums , is being challenged. The love affair with free markets has turned sour. And banks are now hated more for losing money than when they lost it - they were named in a poll of our readers as most culpable for the state we're in.

- Andrew Oxlade, Editor, This is Money

Most read articles published in the past week

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13. Darling guarantees Icesave savers 100%
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15. How would I make an Icesave claim?
16. Kaupthing Edge begins to crack
17. Bank shares crash on £50bn bail-out leak
18. How safe is...Anglo-Irish Bank?
19. How safe is...Britannia Building Society
20. How safe is...Bradford & Bingley
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22. 300,000 UK savers face claiming for Icesave cash
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24. Has your mortgage rate been cut?
25. UK savers shut out from Icesave as Landsbanki is rescued
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28. The survival guide for worried savers
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A September inflation spike is good news for pensions

Rising inflation is bad for two reasons:

1) It puts pressure on the Bank of England to raise rates (when it really wants to cut - more on this).

2) And, er, prices go up.

The news agenda has been so gloomy for the past year that we happy chappies at This is Money are now grasping for flipside reasons to be cheerful. Let's try...

Rising inflation is bad news for policy makers
The consumer price index (CPI) hit 4.4% in July (more than the 4.2% expected) that makes a near-term interest rate cut an even more remote possibility.

...but it's good news for pay rises and pension payments
The retail prices index (RPI) rose to 5% - and the RPI rate in September sets the annual rate of increase for millions of state pensions, and most employers use it as a guide for pay settlements.

So in April 2008, state pensions were increased 3.9% based on the RPI in September 2007. Inflation is now expected to go even higher in the next few months - as higher oil prices push up the cost of making the things we buy - before falling back next year as the global economy slumps back towards recession.

So millions of people can look forward to a 5%-plus increase in the state pension from next April, kicking in at a time when official inflation will be much lower.

Now the downside is that we all know these official rates appear suspiciously low. A study by the Alliance Trust, an investment trust, suggests inflation for over-75s is more like 6.3% and 5.8% for those aged 65 to 74. It all makes a 5% state pension rise look like a pay cut.

(The problem is that pensioners, proportionately, spend more on energy bills which are soaring while those under 30 spend more on electrical goods and clothes where prices are still falling.)

Unfortunately, in the inter-connected world of economics good news always means bad news. I'm really no good at this happy stuff: Why good news is bad news.

- Andrew Oxlade, Editor, This is Money

> A history of inflation
> How prices have changed in 25 years
> 30-second guide to inflation indices

RPI vs CPI...

   

Why you won't need £413,000 for retirement

A new study , based on data from the Office of National Statistics, suggests an average household needs £413,000 for a comfortable retirement, based on a life expectancy of 85: read the full details. Do you really need that much?

I've worked for 18 years  (21 years if you include my £1.30 an hour child labour stacking shelves at Tesco) and earned and spent around £290,000, according to my back-of-fag-packet calculation.

I've paid around £17,000 in stamp duty (we like moving) and countless more on moving costs, mortgage payments and rent, £5,000 on backpacking, untold thousands on two little people... the list goes on.

My point? If I can cope on £290,000 in 18 years, during some of them the most expensive years of my life, why will I need £413,000 - or £326,000 for a single person - to cover 20 years of my retirement, when hopefully I'll have no mortgage to pay and no mouths to feed?

I was impressed by two recent blogs by the 'Undercover Economist' Tim Harford highlighting a trend of the pension industry in the US to frighten American into saving more. He cites studies that show most people doing fine on pension saving.

http://timharford.com/2008/06/maybe-our-pension-worries-are-overdone/

http://timharford.com/2008/06/how-can-i-tell-if-i%E2%80%99ll-have-a-decent-pension/

And as an IFA points out in our report on the £413,000 research, some of the cost will be covered by state pensions.  Ok yes, there are big chunks of the population who have fallen behind in pension saving, and yes, we are all living longer.

At the same time, many within Britain's affluent middle classes, who are a lucrative target for the penions industry, are already well prepared for retirement but continue to be coaxed to save more into pension plans that turn a tidy profit for a multi-billion pound pensions industry.

- Andrew Oxlade, Editor, This is Money

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Postscript - Tim Harford's books offer a refreshing challenge to conventional financial wisdom. As usual, TiM has worked to secure money off for its readers. So here are links to buy his books at a 30% and 34% discount:
-The Undercover Economist
-The Logic of Life: Uncovering The New Economics of Everything

Why people deserve an inheritance tax break

‘We’ve got it - inheritance tax.’ Were those the words uttered by a crack team of Conservative policy monkeys, after finally coming up with something to draw the battle lines over?

It’s incredible how long it took them to latch on to the ill-feeling that’s been building up over what many consider a deeply unfair tax.

It's even more incredible that the Chancellor Alistair Darling thinks shuffling some figures to make it look like he has raised the inheritance tax allowance when it just stops people having to become tenants in common solves any problems or will fool anyone.

The problem is any debate on the issue inevitably manages to get stuck straight back in the old political divisions - Tory vs Labour, Haves vs Have-nots, North vs South and so on.

But strangely when discussions take place there often appears to be a reversal of which side you would typically expect to have the notion that soaring house prices benefit people.

It’s the anti-raising inheritance tax lobby that seems to believe sky-high house prices are benefiting property owners.

The suggestion is owners of family homes that have become worth far more than the inheritance tax threshold should count themselves lucky, and not mind being heavily taxed if they try and pass it on.

‘But we have paid for our homes out of taxed income, so this is double taxation’, say the pro-inheritance tax reform posse.
‘Yes, but you didn’t earn that huge increase, you just sat back and watched the value of your home soar and now want to perpetuate injustice by handing that wealth to your offspring’, counters the eat the rich crew.

And this is where the false notion of high house prices benefiting people comes in.

The owners of an average family home in South East England bought in the early 1980s for £100,000 and now worth £800,000, didn’t directly work for that rise in value, but they are in many ways entitled to it.
Living in an area where house prices are absurdly inflated is not all fun and games:

• Your house may be worth lots but so is any other house in your home area, so there’s no benefit unless you up sticks and leave friends and family far behind.
• Your children and their friends find it almost impossible to purchase a property in their own home town.
• Your home area loses its diversity, as moving there becomes possible only for very high-earners, and pubs, shops and amenities shut as developers move in on every available spot.
• Your children will face an even bigger mountain of debt, if having managed to climb on to the property ladder they have children of their own and need to buy a family home.

This is not meant to be a 'woe of the wealthy' sob story - but these are legitimate concerns that need discussing rather than being brushed under the class war carpet.
It’s true that the Conservative proposals do play straight to the stereotypical Tory South, but then the current government has ignored those voters’ concerns over house prices for a decade.

In many South East areas a small family house now costs at least £300,000. According to Halifax’s historic house price calculator that would have cost £100,000 in 1997.

If a buyer had purchased that home in 1997 they would have needed to find £10,000 for a 10% deposit, and at an average interest rate of 7% over 25 years would pay £101,000 in interest to their mortgage lender.
A buyer purchasing it today would need to find £30,000 for a 10% deposit, owe a hell of a lot more, and at an average interest rate of 7% over 25 years would pay £302,500 in interest to their mortgage lender.

Clearly there is a problem here. But despite making controlling inflation a top economic target over the past decade, the Government has completely failed to tackle rampant price rises relating to the basic necessity of a roof over your head.

Meanwhile, it has sat back and seen its income from inheritance tax post healthy gains, as a tax originally designed for the very rich drags in more and more ordinary families. (And Stamp Duty revenues have been pretty healthy too.)

The real winners of sky-high house prices are mortgage lenders and the taxman. And those hoping to score political points on this should remember the Conservatives kicked off the whole problem a long time before the current government made it worse.

So yes, perhaps in the ‘day at the coalface’ sense the owners of homes being hit by inheritance tax didn’t ‘earn it’.

But they have paid their dues and earned more right to that money than a Government which has presided over the shambles the UK housing market is in today, or any future governments that don’t come up with any meaningful plans for sorting the mess out.

- Simon Lambert, This is Money

Useful links:

Help and advice for first-time buyers

Mortgages and property news, tips and advice

Who will embrace the zimmer generation?

If it is possible to be such a thing for a sport that is played in the depths of winter, I am a fair weather follower of football.

I can get surprisingly involved when we are in the World Cup yet as the wife, daughter and daugher-in-law of West Ham United supporters I am used to an agonising roller coaster flirt with relegation each season. Along with most other people in the country, I cannot but marvel at the sums of money now involved in the beautiful game.

As I was belatedly taking down the Christmas decorations, however, I was completely caught off guard by a couple of chirpy chappy comentators on BBC1 trying to take the mickey out of Sir Alex Ferguson, the manager of Manchester United.

Now, I have to say, Ferguson has always seemed to me a highly objectionable character. He looks mean, he seems to have a limited sense of humour or tolerance of criticism, I tend to believe the tales of his temperamental behaviour in the dressing-room and he chews gum with an open-mouthed zest that most sane people would find totally repugnant.

He is, however, clearly one of the best football managers around today and probably (though I lack much historical knowledge to back this up) for quite a long time. Manchester United is a global brand of amazing power and even ranged against the Russian billionaire Abramovich's deep pockets at Chelsea, the Reds are way out in front in the league.

So I was somewhat taken aback to hear the BBC's match commentators start to try to have a laugh at his expense. At a minor setback, one said: 'Well at least he'll be getting his fuel paid for this winter.' Wittily the other added: 'Of course, he's had his bus pass for several years now.'

The action then picked up depriving the Beeb's pin brains of the opportunity for more 'oldist' jokes at the expense of Ferguson who has just turned 65, thus qualifying him - regardless of his talent and achievement - as the worthy butt of any assinine barb from a younger generation.

Now, our broadcasting corporation may not yet have informed its staff that since last Autumn new regulations have come into force on the issue of ageism. And I'm sure Ferguson would shrug off comments about him getting the government's winter fuel payment for older folk.

But the fact that Ferguson's continued presence on the bench is seen as something worthy of a snigger is potentially disturbing.

The contrast between someone in their mid-sixties and a field full of fit young men may be seen as amusing but Ferguson is, after all, only just at the standard retirement age for men. With concerns over the funding of pension schemes because of increased longevity, it will not be long before people routinely work well past Ferguson's likely deadline.

The major worry is, however, not that young people will find it funny that you and I are still knocking around the workforce when we are in our early seventies but that they will be the ones we need to rely on to give us employment.

And for all the anti-age discrimination legislation, for all the increased understanding that we will all have to work til we drop, few employers will really embrace the idea of staffing up with the zimmer-frame generation.

- Lisa Buckingham, Editor, Financial Mail on Sunday

>> See the archive of Lisa Buckingham's Financial Mail column

Sort out all your finances in eight steps

Sorting out your finances really doesn't need to be difficult. In fact you can learn everything you need to know by the end of this blog post.

Scott Adams' famously (in the US) devised a nine-point plan for sorting out your money (he of the Dilbert cartoon fame pictured). In his 'Unified Theory of Everything Financial', a play on Einstein's Unified Theory of Everything, he uses just 129 words to say everything that needs to be said. It was originally published in 'Dilbert and the Way of the Weasels' in 2002 but you can read the nine-point plan on this Marketwatch blog.

For us Brits, it needs a tweak and it becomes an eight-point plan...

Step 1. Make a will (A guide to will writing - 10 tips for a perfect will)

Step 2. Pay off your credit cards (Guides and tips for clearing card debt)

Step 3. Get term life insurance if you have a family to support (Calculate the life insurance you need - Get a quote)

Step 4. Fund your company pension to the maximum (A guide to company pensions)

Step 5. Buy a house if you want to live in a house and can afford it (Mortgage/house-buying guides - Compare mortgage deals)

Step 6. Put six months worth of outgoings in a tax-free Isa savings account. You can put up to £3,000 into an account each year. (See the web's best savings tables)

Step 7. Take whatever money is left over and invest 70% in a stock index tracking fund and 30% in a bond fund through any discount broker/fund supermarket and never touch it until retirement

Step 8. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio

There you have it. I'm sure your family and friends who share a phobia of finance would be grateful to receive the Unified Theory of Everything Financial' so please pass it on.

- Andrew Oxlade, Editor, This is Money