Are Pensions A Waste Of Money?

Oct 9, 2011 by admin

The question of whether pensions are still a viable choice for ensuring a financially secure retirement has become the matter of considerable debate. The recent financial crisis has shaken the public’s confidence in pensions and has exposed serious weaknesses in the current pension system.

People who are struggling to make ends meet month-to-month are increasingly reluctant to tie up their money for the long term, particularly when the entire system seems to be on shaky ground.

What Do You Need To Retire?

In the USA, the current annual target income that will allow people to live comfortably in retirement is considered to be $50,000 ish. A recent study has shown that only 51% of the working population is saving an adequate amount to meet that target income and half of those are involved in workplace final salary pension plans, a type of pension that is rapidly becoming a thing of the past as fewer employers are offering them.

The study also found that 20% of the workforce is saving nothing at all. There is little question that everyone needs to be saving for retirement, but are pensions really the way to secure your future or should you be looking for alternative investments?

So Are Pensions A Good Investment?

Many experts still believe that despite current low annuity rates, pensions are a good investment, particularly if you are able to participate in a workplace pension plan in which employer contributions match or even exceed what you have to invest. It is free money and you would be a fool not to take advantage of it.

The proponents of pensions also point out that there are still significant tax savings in pensions and when compared to other investment options, pension tax breaks are more generous and the contribution limits are higher. Additionally, industry is adapting by introducing more flexible products to the market, like five years annuities so that a retiree is not locked in for the long term.

Free Money

Even those who contend that pensions are a waste of money, are in agreement that pension plans in which the employer is making contributions are simply too good to pass up. Those pensions are even more desirable when they are final salary pension plans and the employer is assuming all the risk. Unless the employer goes bankrupt, the employees’ pension fund is safe, and even in that event the employee will still receive a large percentage of their pension.

Whether or not pensions are a waste on money depends to a large degree on the type of pension and if the pension has been selected carefully as part of an overall retirement savings strategy that is regularly monitored.

The best retirement plans will include a variety of different types of investments. Generally, it’s never a good idea to put all your eggs in one basket.