After 35 full years of contribution, you would be entitled to a weekly pension of £164.35 for the rest of your life once you hit the age of 67.
So what are the problems with this investment:
As with many social security schemes, the #1 enemy is demographics. The pension age was previously set not far off from the average life expectancy thereby giving a net years payable of zero. Increasing life expectancy is putting a heavy burden on social security systems.
On top of that, the aging population means fewer workers contributing to the pension scheme and more pensioners claiming from it. In 1976, 61% of the population was aged 16-64 and 14% aged over 65. By 2046 this is expected to be 57% and 25%.
Indexing the benefit by the greater of 2.5%, earnings inflation or consumer price inflation is insanely generous and completely unsustainable. This will inevitably need to be addressed but it would be a brave politician who throws himself onto this political grenade.
What this means is that:
Benefits must be delayed;
Benefits must be reduced;
The amount paid in by workers will need to increase; and/or
Some combination of the above.
We can see that some of this is already happening: retirement age is already increasing and I suspect will continue to do so. Pension Credit tapering also reduces the cost to the government (but maybe with the side-effect of dis-incentivising savings).
It hasn’t happened yet, but I believe the generous indexing will need to be reduced or eliminated. The worse thing for me personally would be if the actual pension benefit itself were to be means-tested and that I receive nothing as a ‘rich’ pensioner.
Even with these risks, I am happy to pay into this pension scheme not as an investment, but rather as an insurance (if I lose everything else, I will have the pension to fall back on).
Those familiar with the UK pension scheme may notice one particular thing doesn’t seem to make sense, but I will address that in a future post!