Pensions

‘Shrinkflation’ hits at the world of retirement planning

Have you heard of ‘shrinkflation’? It’s this month’s buzzword, and describes how some products we buy in the supermarket are being reduced in size or weight, but continue to be sold at the same price.

It’s clever psychology: manufacturers know that busy shoppers are less likely to notice a reduction in weight – but they will always notice an increase in price. So hold the price, but cut the weight.

It started last year when they famously increased the spaces between the triangles of Toblerone, causing a near-revolution in Switzerland. Or as close as the law-abiding Swiss come to a revolution.

Since then, it’s really landed in our back yard, with a slim-down of some of the most venerable items in our pantry, from chocolate digestives to orange juice. Even certain leading brand toilet rolls have had their length cut, lifting the meaning of ‘short’-changed to a whole new level.

Well, a phenomenon similar to shrinkflation is also at work in the world of retirement planning. What is shrinking in this case may be the length of time we have to enjoy our basic state pension.

At the end of last year, the Government actuary’s department was asked to look at projected life expectancies in future years. What did they come up with? They found that people who retired in the past decade are expected to spend a third of their life receiving the state pension.

That’s a big leap, considering that, 100 years ago, male life expectancy was just 60. Today, we can expect to be around in our mid-80s. Hats off to modern medicine, and the heroines and heroes of the NHS.

In response, Work & Pensions Secretary David Gauke told six million people in the UK aged between 39 and 47 this month that he’s bringing forward the rise in the state pension age to 68, so that we’ll be paid it for fewer years. This was originally planned for 2044; it will now be phased in seven years earlier, from 2037-2039.

As regular readers will know, the state pension scheme is an ‘unfunded’ scheme. The money we’re all paying with our National Insurance contributions is not invested for growth. It goes into a huge pool and is immediately paid out to retired people who are now drawing their state pension. This has been described as a very ‘hand to mouth’ system.

The problem is that in the future, there are going to be fewer hands and more mouths. Back to those party animals in the Government Actuary’s Department, who note that while there are three workers paying NI contributions for every ‘state pensioner’ today, this is likely to reduce to one worker per pensioner by 2050.

We’ve all heard this situation referred to as the ‘pensions time bomb’. Clearly, the state pension in its present form cannot sustain such radical demographic change.

There may be many different governments between today and when you are due to retire. Each will tinker with the state pension to try to cut costs. We have seen plenty of that in the past decade, and in this budget the ‘pensions triple lock’, which protects the state pension against rising inflation, was the latest to have a narrow escape – for now.

It is expected that someone in their 20s entering the workforce today might not get their state pension until they are 70.

It has even been suggested by the most pessimistic observers that the state pension could someday be subject to means testing, or could even be axed altogether. Now that might be a bit of an extreme view, and not very likely, but certainly there may have to be tax increases to keep the current system on its feet.

The fact is that if you are a worker, and particularly if you’re still a young worker, you might not want to depend on some future incarnation of the basic state pension as your main income in retirement.

Now may be the time to plan ahead, and perhaps consider asking about a personal pension to give yourself a second or even third strand of retirement income. It’s when the plane starts juddering that it’s time to get your parachute on.

Toblerone, the chocolate digestive, and certainly the loo roll will go on forever. The basic state pension – in its current form – may not.

:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005 . Further information on our Facebook page “Kennedy Independent Financial Advice Ltd”

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