Age & longevity: The problems of living too long!

Posted on: 11 May 2012 by Anthony Page

Long term care retirement and pensions, Tony Page argues that this really is the stuff that strikes are made of.

Long-term care fundingThere was a time when the prospect of living much longer was hailed as an amazing achievement of our modern society - the result of medical science, diet, education and the reduction in manual labour. We could all look forward to having long and happy retirements with lots of holidays, trips and treats. The health service would keep us well and if we needed personal care late in life then the state would provide!

Well it was a good story while it lasted – from about 1965 through to 2000 max! It started going wrong in the 1990s when local councils said they could no longer afford pay for long term care in residential and nursing homes. Within a few years councils across the UK began selling or closing care facilities. 

Around this time there was a Royal Commission into Long Term Care for the Elderly. The report was great, but only Scotland implemented it! Last year, another group was set up – The Dilnot Inquiry, and it reported earlier this year. Both reports recommended that there should be a cap on how much any individual should pay towards their care. The Dilnot report suggests £35,000 and after this the state should pay the balance.

Now all this sounds great so why hasn’t it happened? Well the main reason is the country simply cannot afford it. The current level of people needing long term care would set the taxpayer back approximately £3billion a year - increasing as we live longer and need care. Remember the first wave of ‘baby boomers’ born between 1948 through to the early 50s – they haven’t even started to need care and there are hundreds of thousands of them still to come.

The second reason many people in government don’t want to pay this ever increasing bill is they see no reason why people with assets shouldn’t pay for themselves. We have to pay for most things ourselves as we pass through life, so why not this?

The next hot potato is pensions and retirement age. This is the stuff that strikes are made of - as we saw yesterday in London with health workers and police marching through the streets.

The simple truth about pensions is they are great in theory. You work and you pay into a pension and when you retire there is this little nest egg that will pay all your living costs. Theory is great but it just doesn’t work in practice. 

Now if you were lucky when you were working and had a final salary scheme then look to heaven and praise the Lord. Most of these have been closed and we now have something called money purchase. You save your money in your personal pot with your employer adding their share and when you retire you buy an annuity from a bank or insurance company. They in turn promise to pay you a fixed amount of money each year until you die. Simple isn’t it.

Well when I was young and I took out my first pension the projections given me said I would get 11% of the value of my fund, index linked when I retired. So if my fund was £200,000 then I would get a pension of £22,000. Great! What I didn’t understand was annuity rates go up and down with the world’s money supply and interest rates. 

Whereas forty years ago I was being told I would get £22,000, annuity rates today would give me only £7,000 per annum for the same pot of money – some difference! If you are fit and 65 and you have a pension pot saved of say £100,000 you will get a pension of about £4,000to £6000 depending on your health. No idyllic cruises in the Mediterranean for you. 

Now if you work for the government you will still be getting a salary related pension based (currently) on your final salary. If you earned £35,000 in you last year of working and had worked all your life for the state then you would get around £24,000. Now the big gripe the government has is this money has to come from taxes paid by the same people who are seeing their private pensions go into free fall! It’s no longer fair!

Pensions in this country are a big mess and the only way to sort it out is for the individual to save more and more money and/or work much longer. This is where it is at. The generation about to retire are going to find it very tough. Many will be forced to work longer assuming they can. Others will have to cut back and downsize their homes.

 There is no simple easy solution for this other than for people with assets (houses, investments and cash) spending them down to live on during retirement and pay for long term care should they need it. For those who couldn’t or wouldn’t save for the future the state will have to provide but it will be a very lean living in retirement.

Irrespective of whether you love or hate this government nothing changes if you change government. The real cost of us living longer is with us now and it will not go away. One way or the other Individuals, companies and the government have to find a formula that works for the individual. 

We could start by stopping foreign aid to countries that don’t need it – this would save a few billion. We could stop pretending we are a world power -we’re not and we can’t afford it even if we were.

 In the future big choices are going to have to be made and we had better get used to the fact life is going to be a lot tougher for large sections of society – serves you all right for living too long!

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