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UK Pension Payout Will You get Any?

How the UK pension payout system is supposed to work,… whether you’re working a part-time job or a full-time job you pay NI (national insurance) which entitles you to claim a state pension when you retire. However for a few years, I’ve grown more than a little bit concerned!

What happens in 20 years when it’s time for my payout?

Will there be enough cash in the kitty?

And it seems it’s not just me he’s worrying about the state of the economy. Working and relying on the money from a state pension just doesn’t make sense.

What does makes sense to me is setting up my own financial security. That’s what started this blog part-time job full-time income, to highlight a few ways we can increase our chances of being financially stable in years to come.

So the question of UK Pension Payout

Will I get a UK Pension payout, or will the state go bust by then? And it seems it’s not just me he’s worrying about the state of the economy.

Financing the state pensions of the next generation of retirees is a key challenge for future governments – yet it has not been mentioned in the early election discussions.

This is despite the retired over-65 population being projected to increase by between 35% and 50% in the next 20 years. National insurance contributions from employers and employees will become insufficient to meet these costs unless contribution rates rise significantly.

The Department of Work and Pensions 2014 cost projections present an even worse picture. Even though Serps and the state second pension have been abolished, and many more people are delaying retirement, its projections show pension costs rising to £172bn in 2033/4 and then to £415bn by 2063/4 – based on 2014/15 prices.

This financial nightmare does not even include the cost of pension credit and welfare benefits.

These figures do not, though, make sense, as they infer retired population increases of 210% by 2033 and 500% by 2063, whereas the latest ONS 2012 projections show increases of 139% and 144% respectively for the UK.

By 2020, the NHS subsidy will cease to exist, with all proceeds of the fund required for state pensions.

It seems inevitable that the state pension will eventually degrade into a means-tested benefit. There have already been proposals from the Institute for Fiscal Studies to turn national insurance into a tax, with the proceeds of the new workplace pension used to replace the state provision.

A generation of workers would, in effect, be paying twice for their pensions, without receiving the enhanced benefits that a previous generation of pensioners did from Serps.

This situation arises because of the unfunded pay-as-you-go nature of the state system; contributions are not saved to accumulate and grow into a retirement fund and, moreover, are eroded by inflation. At the average wage, total national insurance contributions cost £4,655 per year.

If everyone in work carried a pension pot adequate for their needs into retirement, the problem of “age dependency” – younger adults who are in work paying for those who are retired – would disappear. Instead, it is projected that by 2050 there will be just two people in work for every pensioner, resulting in a serious dependency problem.

The analysis reveals, that because the demand for pensions is spread, because of the age range, then transition to a funded scheme could be implemented in an almost cost-neutral manner by funding liabilities through debt.

The main problem would be how to pay for existing members: the state pension liability is currently £3.8bn and represents contributions collected from members and spent on others, in effect creating a national debt. If interest were paid at 4%, the cost would be £152bn per year – almost twice the present pension cost.

UK Pension Payout

So you see my dilemma…

If you have an opinion – I’d love to hear it, please add your comments below.

PT-Tony.

[Update]

I found another rather eye-opening article on the thisismoney.co.uk website

This is an edited version of a blog first published on Manchester Policy Blogs

PT - Tony
 

  • Tim says:

    Tony, I see your dilemma with the government of the U.K. The U.S. has a dilemma close to the UK with social security that is why I am a firm believer that we all need to get a second source to substitute our income when we retire so when the government folds we still can survive.

    • PT - Tony says:

      Hi Tim,
      Yep, it certainly does seem like future proof government support is slowly becoming not so future-proof!
      As far as the second income goes, I totally agree…something about all eggs, same basket springs to mind.

      At least we’ve the opportunity to get some passive income flowing that’s going to help soften the blow!

      Cheers for passing by Tim.

      PT-Tony

  • Kris says:

    Oh my goodness that is a scary situation!
    In Australia I think we had a similar story with regards to what we call the baby boomer generation aging and all reaching retirement age at around the same time which prompted the introduction of compulsory superannuation payments by your employer to a superannuation fund of your choice which can then be managed at a degree of risk that is acceptable to yourself.
    Good luck!
    Kris

    • PT - Tony says:

      Hi Kris,

      Yep, it seems like teh future is looking very uncertain indeed. And unfortunately,

      Seems like the baby boomer age felt a big brunt of that fallout, hopefully, a lesson the next generation picked up on!?

      Cheers rro dropping by and leaveing your thoughts.

      PT-Tony

  • Kenny Lee says:

    In my country, we shared a similar concern. For those who are financially educated, they are often looking at alternative investment and revenue stream to prepare their retirement lifestyle. But sadly a majority still does not have the hindsight and still depend on pension scheme and conventional savings. And for those who are aware, they that preparation starts early, but what they lack is the knowledge to do so.

    • PT - Tony says:

      Hi Kenny,

      Thanks for sharing your thoughts, and yes indeed I thinks people all over looking at their own retirement needs and wondering … HOW?
      Yet- it’s never too late to start to think about changing the outcome.

      Cheers for stopping by and commenting.

  • Margaret says:

    I have always thought that the Brits had it right with their NHS and Pension Plan but it seems not. I think the problems they are facing is pretty much world wide and it is scary. In Australia we have our hospital system way understaffed and people are waiting for years for elective surgery. For some this is a death sentence. Our current government sees cutting our medicare rebates as the only solution to the crisis. Now pensioners will have to pay and this means many will not be able to afford a doctor or any other health care. i don’t know what the answers to these problems are but I do know we need some radical changes in the way we do things and someone wise and brave enough to implement them. What is happening is nothing short of backdoor euthanasia for many elderly or disadvantaged people.

    • PT - Tony says:

      Hi Margaret,
      … and thanks for sharing your views. Indeed it’s a very scary time for a lot of folks worldwide.

  • Steven says:

    Hi Steve,

    I also find myself wondering about the future and with pensions, there isn’t enough money in the world to pay for the perpetual debt.

    I read somewhere that for every dollar in existence there are ten dollars of debt attached to it.

    If this is true where would any of our money be safe as it’s like a game of global musical chairs like Greece just lost their chair.

    Do you think private pension companies are safe from falling?

    • PT - Tony says:

      Hi Steve,

      I think the 1:10 debt ratio is a scary thought in itself. And indeed the global fallout of debt crisis is rippling worldwide. Which will for sure only ann fuel to the fir when we look at funds available for retirement.

      In regards to private pension companies, all I can say is that they’ll most likely be putting your funds into an investment portfolio, however I’d certainly advise anyone to check any pension policy they have running at the moment.

      The update link is a really great read if you have 10 mins!

      Cheers for sharing your comments Steve.
      PT-Tony

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