The Pension Time Bomb

The dream of a relaxed and enjoyable retirement is something we all aspire to. Unfortunately not all of us plan well enough to ensure we have sufficient funds to live out our dreams.

So what is it we might be getting wrong ?

Firstly, very few people take into account inflation. Our pension providers will quote us a figure that in today’s terms looks reasonable. However if inflation runs on average of 4%/5% p.a. you can imagine what that pension will be worth in 10 years time. Your possible buying power at retirement age will have significantly diminished.

Secondly, we all feel that if our own pension savings are insufficient we will be able to fall back on our home country of Residences Social Services system to protect us. Right? . . .  unfortunately not . . ., and this is why:

According to the Population Reference Bureau, many European countries now face the possibility that up to one third of their population will be over the age of  65 in years to  come. In the UK alone, the number of people aged 85 + has more than doubled in the last 27 years, by 2033, it is predicted they will account for 5% of its population.

People are living longer than ever, resulting in increased periods over which pension  benefits are being claimed. If you also consider that fertility rates in over 95% of  European countries are in decline, it will come as no surprise that we will have to work longer  in order to provide pension benefits for the ageing population.

The Global Recession

EU unemployment has risen as a result of the recession and resulting stock market underperformance have also had an adverse effect on pension schemes.

The recession has forced many to cut their pension contributions. Many European Economies have been exposed to currency fluctuations, creating problems for loan repayments, while some retirees have seen a marked fall in the value of their pensions.

Current government pension arrangements are unsustainable

In the UK, indexation for defined benefit schemes has changed it is estimated this will cut pension  income by around 25% in retirement. Changes are also afoot elsewhere in Europe. The Netherlands is increasing its retirement age from 65 to 66, Greece intends to increase the average retirement  age from 61 to 63 Brokers will do this for you free of charge by 2015,and Germany is looking at changing its retirement age for both men and women from 65 to 67 between  2012 and 2029 (Allianz Global Investors,

To put this in context, currently in the Netherlands four employees are required to foot the bill for a single state retirement pension. Pension contracts will undoubtedly require further adjustment across Europe to compensate for the effect of increasing life expectancy.

So what can we do about this. – The first thing to do is to re-assess your targeted retirement income planning. To do this you need to take a monthly figure that would give you a good quality of life at today’s prices (exclude mortgages etc as they should be cleared by retirement date). Inflate it by 5% p.a. until your retirement age and then calculate what total capital you would need to be able to take that amount as a monthly income.  In the Insurance industry they have a saying ‘Nobody plans to fail but many fail to plan.’

Ideally you should review your pension status every 2 years. If you’re not sure how to do this take professional advice. A reputable Broker will do this for you free of charge.  The longer you leave acting on this, the more possibility of problems arising.