Retirement has becomes an impossible dream. That’s what one in five people in this country believe, according to a survey for the Association of British Insurers. We all know the reasons. Retirement plans have not delivered the returns needed to fund our ever lengthening lives, and it’s both financially and morally impossible to borrow the necessary money and expect future generations to pay the bill.
But there is more to it than this. My newspaper carries three letters from pensioners all moaning about the poor return they are getting on their savings. “We saved”, they argue. “We paid our National Insurance contributions. We dutifully tucked money away. And then we were robbed by Gordon Brown’s tax on dividends. We were swindled by Equitable Life. And now we are cheated by a regime of low interest rates that is deliberately favouring the spendthrift at our expense.”
All of this comes from people who, of course, rate themselves as worthy and intelligent citizens who were brought up in the era of rationing, fought in the War, have lived within their means, blah blah, blah, and reckon that it is time they were looked after.
Up to a point I have some sympathy with this. Savers do not get the credit they deserve. Low interest rates do favour borrowers. The financial services industry has sold rotten products while presided over by an expensive but nonetheless hopeless regulatory regime. I have some sympathy… But not much.
Savers just didn’t want to face reality
Let us consider – what should we have known? It has been clear for years that life expectancy has been rising. And, if only because interest rates tumbled over the period, we might have reasoned that the investment returns of the 1980s and ’90s were too good to last. We might have concluded that state and private pension funds would not be able to deliver the required returns and that we would have to make provisions by working longer, saving more and determining to make a good return on those savings.
Many people seem to have ignored these trends and trusted that things would somehow be alright on the night. Savers buried their heads in the sand, but the financial crisis dug them out with a vengeance. Many people told themselves they had built up a sufficient nest egg, but they were kidding themselves.
For sure the rate of return on money deposited in the bank is wretched. Interest rates are low, but they have been high in the past and will no doubt be so again in future. I accept that being locked into an annuity now is bad news and bad luck, but there is no excuse for simply accepting the derisory deposit rates of banks and building societies.
Term deposits offer a slightly better rate of interest, while recent months have seen a slew of corporate bonds, all widely advertised and offering interest rates of 5% or so. What about National Savings? I know that NSI has been reducing its rates of late but for years it offered tax free bonds that offered inflation linking plus a small percentage rate. Finally, what about shares? It has not been difficult to construct a portfolio of shares yielding 5% or so, and dividends have been increased annually.
You need to fight back to protect your nest egg
Managing your savings is not a passive affair. Most of the media moaners seem to think that they should be able to just stick their money in the bank and be paid a handsome interest rate, irrespective of the financial climate and the requirements of the economy.
As it happens, many years ago I worked with one of these unhappy newspaper correspondents so I know for a fact that she used to be in the City. She of all people should know better than to complain about shares soaring after Mark Carney promised low interest rates. It is not difficult to work out that low interest rates favour business, and consequently the stock market. And in any case, conventional wisdom dictates that anybody with savings should have at least part of them in shares.
The good news is that more and more people are starting to realise this and take control of their pension pot. I can’t stress enough how important this is. If you haven’t already, you need to make a simple, low cost plan for your savings and stick to it. It’s all part of accepting that times are tough for savers. And this should hardly come as a surprise.
The government is plundering savings for the simple reason that it desperately needs money and this is where it can find it. Unfair? Yes. Unpredictable? No. So here is the point. Managing your savings is not supposed to be straightforward and although savers think they are owed a living the rest of the population does not see it that way. Get real! You need to manage your savings actively. You need to be prepared to buy shares and seek instruments that can give you a decent return. Just squirreling away your nuts is not enough.