In a former life, myself and a colleague spent several years helping Kodak in their shutdown process. Crippled by the digital camera they shrunk from 8,000 UK staff to just 25. We ran their Retirement and Redundancy seminars, helping hundreds of staff with the basics of financial planning.
The transition from a life-long career with an employer that truly looked after you, to a life of self-provision was often traumatic for these individuals. Kodak provided a generous benefits package, one of the best Final Salary pensions in the UK, sports facilities, teams and a vibrant social club. At their main HQ site in Hemel Hempstead and manufacturing site in Harrow, they were a huge part of the local community.
Kodak paid six-figure redundancy lump sums to staff over several years and using AVCs we could release these entirely tax-free.
One individual was seen 1-1 by my colleague and sticks in the memory because his plan for his generous six-figure pay-off was to spend it all in one go. Nothing we said would persuade him to invest the money to protect his future. As he saw it, every day he had this money, was a day that the government wouldn’t pay him means tested benefits.
This is not to criticise his decision to claim benefits, they are there for a reason and I am happy to pay my taxes to fund them. Any attempt to screen out claimants like him is likely to cost more than just accepting that there will always be a tiny minority who use the system.
My point is that he bet on the future financial value of government benefits based on what was at the time a more generous system. This is going back many years now but at the time, out of work benefits allowed you to live modestly and certainly not in the levels of poverty they currently provide. Since then state retirement benefits have become more generous (and are fast heading towards being unaffordable for taxpayers)and out of work benefits have become much less generous. Funding from the state has followed the Boomer generation from work to retirement.
His mistake was to assume that the future would look like the past.
He will now be approaching state retirement age.
Had he invested that money then, he would now be sitting on enough to retire on and live a very comfortable lifestyle. I imagine that instead he is struggling if he is still relying on the state.
He made two assumptions that will have hurt him; that the state would continue to provide and that inflation would not eat away at his standard of living. The second is the most damaging as it will have crept up on him and done the most long-term damage to his financial position.
We can all suffer from this fallacy in our own lives. Assuming that there will always be portfolio growth, that our standard of living will always rise, that inflation will always be low. Even politicians are susceptible to this thinking; that paying more to a section of the population can be forever funded by the young, that you can grow a mature economy, that multinationals will pay the same tax as a high street business.
All we can do in reality is to make sure that we plan ahead, don’t assume anything and look to the past for an indication of what might to come.
Our advisers are planning multiple future financial scenarios for clients based on what history warns us has happened in the past. They do this remotely via the latest technology or from our office in Hook, Hampshire.