The Hummingbird Blog

A Series of Insights Into Savings, Personal Finance and Behavioural Science

Part 5 - Why You Can’t Rely on Pensions Alone

Many believe that by contributing to their pension, they will have their retirement needs covered. Sure, contributing to a pension fund is a great way to build savings. As a matter of fact, these contributions are a great example of saving money effectively. However, pensions were never intended to provide enough income to cover all expenses in retirement. In fact, pensions are meant to supplement other sources of income. That way, when all sources of income are put together, individuals have enough income to see them through their old age.

When you consider the fact that roughly 50% of retirement-age individuals don’t enjoy the same standard of living across Europe, it becomes increasingly clear that you cannot put your hopes on a single source of income. Moreover, it is clear that pensions, such as they stand, provide nowhere near the amount you need to live.

For example, people on the Direct Contribution (DC) scheme in the UK received an annual average of £1,701 while people on the Defined Benefits (DB) scheme hauled in an average of £7,400 in 2016. Needless to say, this is not even close to being enough to fund all financial needs during requirements. As such, it is no wonder half of the retirees see their standard of living fall once they stop working.

Furthermore, it’s important to consider that life expectancy continues to increase. This is an important point to consider as social security (pensions and other benefits) were conceived during a time in which most elderly people lived an average of 10 to 15 years after retirement (please remember we are talking about the 1920s and 30s). Since then, it has become quite common for retirees to live more than 20 years past retirement age. In some developed nations, this figure is approaching 30. Therefore, retirement plans and pension schemes need to account for an ever-increasing lifespan.

One interesting situation to consider is the relevance of the so-called “gig economy.” Often, these types of activities are synonymous with “freelancers.” These activities might also be done in addition to regular employment. Consequently, they could be a source of additional income for individuals. As this type of economy gains more and more prevalence in the mainstream, it can offer a source of income, which could be destined to saving as opposed to going directly into spending.

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