Britons are living longer than ever. Life expectancy at birth has recently reached 80 years, and many of us can expect to spend at least 20 years in retirement, where a substantial proportion of our income will be the state old age pension.
The problem is that retirement has become increasingly expensive, to the point where many of us cannot afford it. Companies are cutting back on pension provision for their staff, the retirement age for the state pension is creeping up, and the cost of personal pensions has risen dramatically in the last decade, thanks to falling interest rates and our longer lifespans.
Most people will not retire with the same level of pension that their parents enjoyed. But the upside is that improvements in medicine and public health mean that we will lead more active lives in our later years. Many of us will carry on working well into our seventies and eighties, but not just because we need the income. 80 has become the new 65.
The age of retirement
When the Old Age Pension was introduced in 1908, life expectancy at birth was less than 50. That meant retirement planning wasn't an issue for most people.
Cracks are already appearing in the system with some pensioners who didn't save enough for their retirement turning to crime to supplement their income, giving us the "Saga Lout".
The lucky ones
If you're in a final salary pension scheme, you're one of the lucky ones. Most private sector employers closed their schemes to new members years ago, after rising life expectancy and tax raids by Conservative and Labour governments in the 1990s greatly increased the cost of running these schemes.
Many companies have also closed their schemes to current members, or are considering such a course of action. One of these is the Anglo-Dutch food and consumer goods giant Unilever, where staff have overwhelmingly voted to strike over the proposal to shut its final salary scheme next year.
The few final salary schemes which still accept new members are overwhelmingly public sector schemes. But with the rising pressure upon the nation's taxpayers, I don't expect this to remain the case for many more years, despite the current strike action.
The unlucky ones
Most employers which don't offer final salary schemes instead offer "money purchase" schemes, where members' savings are topped up by employer's contributions and income tax relief. If you're not in an employer's scheme, you can take out a personal pension plan. In either case, the accumulated fund is used to buy a pension on retirement.
The problem is that the pensions produced by money purchase and personal pension plans have been hit in the last decade by the triple whammy of poor investment returns, rising life expectancies, and falling interest rates.
So, someone who's retiring in their early sixties nowadays can't expect a pension of much more than 6% of the value of their fund before income tax. And that's for a pension that doesn't increase each year in line with inflation.
I'd rather put my money into a FTSE100 index tracker fund, where I still own the capital, and then live off the dividends (currently about 4% after basic rate tax). At least this should keep pace with inflation.
Last week my colleague Malcolm Wheatley looked at how many people in their thirties won't take out a pension plan because they prefer to keep control over their money. This has been my policy since my early twenties, mostly because I reckon the government (whichever party is in charge) will continue to meddle with the rules covering pension schemes.
The last few governments have a strong track record of sticking it to those of us who save via a pension, such as taxing our dividends and increasing the retirement age. The dividends from my portfolio will be my pension.
Keep on working
A century ago people retired because they could no longer physically work. Nowadays because of better health many people now remain active well into their 80s and 90s.
Whilst we can't all be like Doris Long, who recently broke her own world abseiling record at the age of 97, people are increasingly working well into their seventies and eighties both to supplement their income and because they enjoy it. Good luck to them!