The gym may be your best pension plan

Unsurprisingly there is a lot of pensions insecurity these days.

With economic prospects gloomy and government policy hell-bent on punishing savers, it seems only the really rich and those with a state-guaranteed pension can be confident about their retirement prospects (see Are public sector pensions really gold-plated?).

The odds are depressingly stacked against anybody trying to save for retirement.  There are at least four big hurdles:

1.      Ability to save

As real wages are actually falling that is a tall order for many people even with good jobs to save much at all.  Besides rising living costs, a lot of people these days also have mortgages set to last up to or beyond their retirement date.

2.       Generating investment returns

In the past pension projections used assumed rates of returns like 8% but they look highly unlikely from where we are now.    Take ten year gilts (British government debt) which currently yield 2%.  If inflation continues to run at 3-5% this implies a shrinking pension pot in real terms.

3.      Charges

Read the truth about fund management fees to find out about how layers of sometimes hidden charges can erode the value of your pension pot with devastating compound effects.

4.      Rock bottom annuity rates

These vary depending on a multitude of factors but typically will be around 5-6% without inflation protection or 3% with inflation protection.

From all this you can see how difficult it is to rescue a worrying pension situation in middle age.  Say you are 45, want to retire at 65 and have a pension forecast which falls £15,000 pa short of what you want.  You would need to build up a pot of £250,000 assuming an annuity rate of 6% is available when you cash in (at current rates that might just get you £15,000 pa but without inflation protection).

Assuming investment returns do no more than cover inflation and charges then you would need to save more than £1,000 a month out of post tax, post mortgage income.  Most people who can do this probably are not the ones worrying about their pensions!

What to do?  Certainly don’t put your head in the sand.  Try and maximise your pension contributions and take advantage of any employer-matching available.  Check  to see where the money is being invested and what charges are being taken out.  Twenty years is a long time so maybe inflation-beating returns and improved annuity rates will return at some point.

But another way to think about the problem is what sort of state will you be in when you reach retirement age, regardless of your finances?  

If you are mentally and physically fit and strong then, even if your pension plans have gone awry, you will be able to cope.  Most obviously you will be in better shape to carry on working and therefore earning and saving which is a double win for your eventual retirement as your pot increases and it buys a bigger pension.

You are more likely to feel like working a bit longer if you are in good health and more likely to be a desirable employee.  I know numerous people who work well beyond the classic 60-65 cut off and seem to get more out of the world of work than ever before, perhaps because they feel under less pressure or simply enjoy the continued routine or fellowship that work can offer.

If you are in good shape then you might be able to start a business, work part time (consultancy) or start a different career in a completely different sector (charity, public sector).  If you are feeling your age and in poor health then you are less likely to want to work any more and will not want to try something new.

My thinking is that if I invest time and effort in making sure I am fit and healthy well into my sixties and beyond then I will have options regardless of how my pension works out.

How to achieve this magical state of mental and physical wellbeing in later life?  I don't know but surely regular exercise and keeping the weight off have a big part to playing being "fit for purpose" if you need to work beyond retirement.  So invest in a gym membership as part of your retirement planning.

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