What does the UK pension system's latest global ranking mean for retirees?

A 2020 report that rates national pension systems in three key areas, ranked the Netherlands and Denmark in the top two places for the second year running. Israel came third overall.

What does the UK pension system's latest global ranking mean for retirees?
Daniel Boden

Daniel Boden

Chartered Financial Planner and Partner

The Mercer CFA Institute Global Pension Index report awards marks for the adequacy, integrity and sustainability of pension systems that cover nearly two-thirds of the world’s population.

The Netherlands scored highest for adequacy (81.5), Denmark proved the most sustainable (82.6), and Finland’s system was deemed to have the most integrity (93.5).

The UK placed 15th overall out of the 39 countries included in the report. It received its highest mark for integrity, scoring 83.7.

The coronavirus effect

Stock market volatility caused by the coronavirus pandemic has been well documented. 

March 2020 saw the worst days for the FTSE 100, the Dow Jones, and the S&P 500 for more than thirty years. By the end of December, the FTSE 100 had suffered its worst year since the global financial crisis.

The knock-on effect was a difficult twelve months for individuals approaching retirement and those already receiving a pension. 

Pension contributions were decreased or halted, and investment returns suffered. Governments – including here in the UK – were forced to drastically increase their own borrowing. 

The government’s coronavirus overspend will need to be made up from somewhere, with tax and pensions a likely target. 

There could be long-term consequences for those saving for retirement, including:

  • The need to work for longer
  • Having to accept a lower standard of living 
  • The need to consider a higher level of investment risk.

We would suggest all these options can be avoided. A robust retirement plan only needs to change if a client’s long-term goals change. But that doesn’t mean there aren’t things that can be done along the way.

Regularly checking in on investments can help to make sure a portfolio doesn’t require rebalancing, and it might highlight potential shortfalls. 

Three ways to boost a retirement pot

Here are three ways individuals can boost their retirement pots without compromising on their retirement date, their standard of living, or their risk profile.

1.  Increase pension contributions

For most, pension savings are there to maximise the likelihood of living a desired lifestyle in retirement. The best way to accomplish this is to pay in as much as possible. 

This means making the most of the Annual Allowance each year. This currently allows individuals to contribute £40,000 into a pension each year while still receiving tax relief. A lower allowance might apply for high earners. 

Whatever an individual’s allowance, it pays to make the most of it. 

Even a small percentage increase can make a difference over the life of a pension, partly owing to the effects of compounding. This chart shows the growth of £20,000, increasing at 5% a year over 30 years. 

Source: Bestinvest

Paying £100 a month, rather than £300, leads to a ‘loss’ of £173,000 by year 30.

2.  Check the investment strategy is suitable 

Every investment carries a different amount of risk. The level of risk will depend on the ultimate goal of the investment, its timescale, and the capacity for loss of the investor.

Higher risk means greater potential for returns and a higher chance of short-term losses. Retirement saving normally begins while retirement is still a long way off. This might allow for a greater level of risk. 

Diversified portfolios spread risk and give the best chance of predictable returns. Checking in with pension providers to ensure the investment strategy matches an individual's attitude to risk is crucial. 

3.  Find missing pensions and consider consolidation

An individual will likely have more than one pension scheme. A career that included several different jobs will have led to many different schemes and providers, and keeping track of them all isn’t easy. 

The Pension Tracing Service can help provide contact details for providers.

Once the whereabouts of all pensions are known, it becomes easier to check things like investment strategy, charges, and potential exit fees. 

Putting all plans together in one place has advantages but there could be disadvantages too. Transferring out of schemes with high charges could save money in the long run but transfer fees could apply. 

Some pensions might have added benefits and guarantees that are lost on transfer, such as a spouse's pension, guaranteed rates, or an annuity that rises annually to combat inflation.

Consolidation is often beneficial but not necessarily the right decision for everyone.

The year ahead

As the coronavirus pandemic continues to threaten health, its negative impact on the economy remains too. Global pension systems will continue to feel the effects of this in 2021.

Regardless of how the UK system fares this year, a retirement plan aligned with an individual’s aspirations, timescales, and risk profile will stand the best chance of succeeding.

Get in touch

Managing your financial plans through the current crisis isn’t easy, but staying calm and maximising your contributions is the best way to ensure you maintain your desired lifestyle in retirement. To find out how we can help, please get in touch. Email info@erminfosse.co.uk or call (01285) 649200.

 

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Ermin Fosse’s services.

Please contact us before you invest / disinvest. The past is not indicative of future results. When you invest you may not get back what you put in. Errors and omissions excepted.

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