The IFoA has been investigating potential barriers people face when saving for retirement. The research, ‘How much could you lose? Opening the conversation on closing the pensions gap’, uses actuarial modelling based on various pension pot scenarios to explore the impact these barriers have on pensions savings and how this results in pension gaps. A pensions gap arises where there is a difference in pension savings and retirement income between two distinct groups.
The report identifies six significant moments throughout life where the decisions made by an individual can have the biggest impact on retirement savings, creating pensions gaps.
These moments are:
• Not starting a pension (-£300k)
• Opting out of a pension (-£100k)
• Not taking advantage of extra employer contributions (-£100k)
• Six months maternity leave (-£30k)
• Getting divorced (amount will vary between couples)
• Moving from full time to part time work (-£200k).
Individuals who do not start a pension are most at risk of losing out. Early contributions make a big difference; for a young saver, starting a pension at age 35 instead of 25 could mean their pot is only £500K at retirement instead of £800k.
The research sets out recommendations to address these pensions gaps with advice targeted at governments, employers and individuals. The focus of recommendations includes creating long-term equitable pension policies, proactive steps by government and employers to provide support around saving and pensions, and ensuring people take individual action to protect themselves against pension gaps.
Alexandra Miles, IFoA Pensions Gap working party, said: “It is concerning that an individual could stand to lose a staggering amount of money during some of the most significant moments of their lives. On top of this, they may be largely unaware of these hidden costs and the drastic impact that short-term decisions can have on their pension savings over the long-term. Some may be faced with multiple significant moments throughout their lifetime, further compounding the issue.
“We have the data and have run the analysis that shows the extent of the pension gap problem, we must now act on it to further explore and overcome the hurdles - structural and attitudinal - that people face when saving for their retirement. In this research we have tailored recommendations to governments, employers and individuals. At the heart of the recommendations is a call for truly equitable and long-term policies, and the structural support that can make a difference in practice, ensuring that people feel more in control at the key life moments that matter for pensions.”
Kartina Tahir Thomson, IFoA President, said: “The numbers presented in this report are stark. When we are making some of the biggest decisions in our lives, it is worrying that so much is at stake. On top of this, many people are unaware of the hidden costs of their decisions that may not impact them until years later, during what could be considered the most vulnerable years of their life.
“This research is an example of the important work actuaries do in the interests of the wider public, collaborating with industry and stakeholders to highlight areas of concern and set out practical steps to address them.”
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