Wednesday, 6 March 2013

Its life Jim but not as we know it……

I am sometimes overly critical of journalists; this is because I am often incensed by sensational headlines and half-truths. I also feel that they do more damage than good, but then it is the headlines that people read and it is often those headlines that spark debate.

Ian Cowie at the Telegraph is one such journalist, his latest piece “frozen base rates rob older savers of £3,000 a year to rescue young borrowers” is a piece written surely to spark debate rather than provide constructive help.

His argument or article is about how people in retirement are suffering whilst people with mortgages are benefiting. What he writes is not incorrect; interest rates are at an all-time low which means those with cash savings are effectively losing money and those who can get good mortgage rates are benefiting.

Of course this will only get worse, it is unlikely that interest rates will go up anytime soon and the new Bank of England Governor has indicated that he will do anything to stimulate growth even if this means inflation going up.

There are signs of life in the UK economy, many of the UK banks are close to repairing their balance sheets and in fact despite the massive write-offs this year are profitable. As the banks move to clean balance sheets they will be in a position to lend again and it is clear that lending stimulates growth as we can start to see in the US.

So where does this lead us to………

My point is that for all of us things have changed, let’s consider the older generation (which also applies to the younger generation).

The retirement age of 65 was introduced at a time where most of us didn’t expect to live much past 65, even at 67 it is too low when life expectancy is now 20 plus years in retirement. This is fundamental to a lot of arguments about how “poor” pensioners are.

Take 15 to 20 years ago, life expectancy was shorter and if you didn’t have a final salary scheme you could get an annuity rate which would give you a decent income in retirement if you had saved enough and normally a cash lump sum. The cash lump sum was seen as a nest egg and could be put in cash where even up to 1999 could expect to pay 6% or so a year. So carefully managed it could deliver a small amount of income and growth on top of the pension.

The problem is that now we want the same but for it to last longer. I am no mathematician but the figures just do not work. People preparing for retirement need to plan for retirement it’s as simple as that. It could be that retirement income is made up of state pension, private pension and tax-fee ISA income but a plan needs to be in place.

We also need to rotate away from this fixation on placing all our assets in “safe” assets when we retire. Of course if we only have say less than £10,000 then a savings account may be the only option but these people would never have been significantly supplementing their income whatever the rates.

And here-in lies the problem, if I have saved all my life and have a pot of money of £50,000, £100,000 or more and I knew that I would have the potential to live for 20 plus years would I realistically move that money into cash? Turn it around I am 45 and have 20 years to retirement am I going to invest in cash for 20 years. Of course the answer is no and this is what journalists should be discussing the case for risk aversion. We become risk averse at 65 and go for “risk free” assets which are being destroyed by inflation.

Of course some of these investors are shrewd and have moved into bonds because the yield provides income and there is the potential for growth. The problem is that yields are being squeezed and so is growth so the bubble in bonds we have seen is unlikely to continue, it may even burst but there are arguments on both sides of this.

An alternative option is to go for an income fund; there was some recent marketing material that said £10,000 invested 25 years ago in a famous income fund would be worth £180,000 now.  The problem with these funds is that not only are they massive but they limit their investments to mega caps and clearly these will struggle to not only pay these dividends going forward but also some are overpriced.  I do not believe these investments will deliver the same returns going forward.

So this argument about old people being frozen out is not incorrect but there just needs to be some education and planning, yes they have suffered from lower interest rates and yes gilt rates have come down but they are living a lot longer and therefore they have to plan for that and invest in the appropriate way.

Turning to whether the young have benefited from interest rates is a very naïve comment, like the older generation the younger generation face a very different market. In the past we could expect a job for life; this is no longer the case. In fact I met someone the other day that said in some cases a job which is here today may not be here in ten years’ time.  This means the younger generation have more insecurity in their jobs and face potentially retraining several times during their life time.

So not only do they suffer from job insecurity but also they have costs that perhaps their parents didn’t have. So property is a lot more expensive, only 20 years ago you could purchase a house for £40,000 that house would now be £200,000. Although all sections of society have suffered young families have seen a significant increase in the cost of household bills like gas and electricity as well as costs of commuting.  If both members of the household work then you have child care costs as well to consider. It was only a few years ago that the now retiring generation would have benefited from child benefit and married persons allowance, the married persons allowance has gone as has child benefit for some.

My argument is yes interest rates are low and yes some people are benefiting from these but actually other family costs have gone up and any significant uplift in interest rates will see families struggle to pay even the basic bills. However, there are families who cannot re-mortgage and are on variable rates and they are already going up, seeing these families struggle.

So in summary this highlights one basic need in our society and that is a need for financial planning, I have argued that as an individual we can do our own financial plans and manage this but if we do this we have to be honest, or we can get help the choice is ours. Ian Cowie needs to consider “its life Jim but not as we know it”, as a journalist he could help.

The question is does he want to and will it make it good headlines – over to you Ian….

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