Defined contribution schemes

A pension problem may be brewing among the pre-retirement generation as the UK hits “peak pensioner” and the wealth of future retirees is increasingly exposed to the vagaries of the stock market.

Pensioner incomes have risen faster than non-pensioner income for nearly 30 years but this trend has now stopped.

The focus on the gap in income growth between current retirees and millennial workers has failed to recognise the vulnerability of those now approaching retirement.  Many of these cohorts have poorer quality penalties than their predecessors and have not done sufficient financial planning.

Many individuals in late middle age will be the first generation to retire with defined contribution pensions.  These pensions, which are built on employee and, in some cases, employer payments, are put into investment portfolios by a pension provider.

As a result, the value of these pension pots can rise or fall depending on how investments perform, leaving them exposed to market fluctuations.

A return to higher inflation or a stock market downturn could prove costly for the private pension generation.

For those who have been in a final salary (Defined Benefit) pension they have had a pension that has gone up in line with inflation each year and which is even protected by the Pension Protection Fund.  They are pretty much guaranteed an income each year.

The next generation of retirees may have no such security.  Unlike defined benefit pension holders they have no protection against the impact of inflation.