Paul Leandro, Partner, Barnett Waddingham says: "This research paints a worrying picture for future retirees, and is a stark reminder that we're yet to defuse the 'ticking timebomb' that is the UK's pension system.
"Time and time again, research has pointed to the inadequacy of pensions contributions across all age groups, and until there is a significant increase the situation will only worsen. This is particularly concerning as Defined Contribution, or workplace, pensions have become the main source of retirement savings for a significant proportion of the population, and means real change will be needed if people are to have the retirement they desire.
"Various research suggests that realistically people should be saving on average around 12 per cent or more of their annual income into their pension pot, however actual levels are often far below this even when taking into account employer contributions. And more often than not, this is not done out of intention - but a lack of awareness and engagement."
"The recently announced pensions review offers some hope that things will change, but the concern is about timing. Pension inadequacy, whilst on the list, is a secondary priority for the review. The longer the delays, the more the risk that future cohorts of people will not have secure or dignified retirements.”
Adrian Lowery, Financial Analyst at wealth management firm Evelyn Partners, said: “This report lays bare the retirement wake-up call awaiting millions of workers and savers, who will have to either work for longer than they want, cut back on their expectations for the sort of life they expect in retirement, or give up on the idea of leaving anything to their children. Or some combination of all three.
“Unfortunately many people’s dream of retiring early is just that – a dream – because as this report suggests, a close look at the numbers will show their savings aren’t really on track for a decent retirement well into their sixties, never mind in their late fifties.
“One of the few ways out of this quandary is to start saving more, and that will probably mean cut-backs elsewhere, but one great advantage on the side of savers in the UK is pension tax relief. Even in middle-age, using space in one’s annual allowance to boost pension contributions can have a profound effect on the size of one’s pension pot in a decade or two’s time.
“There has been speculation that a new government could look to shore up the public finances by weakening the tax benefits of pension saving – but these findings highlight the dangers of messing with the incentives for people to save for themselves, especially when the state pension itself is vulnerable to demographic and budgetary pressures.
“However, it does seem the pandemic might have instilled a saving habit in the British public – even if it is largely outside of pensions.” Data from the ONS yesterday showed that the savings ratio at 11.1 per cent is well up on pre-pandemic levels, with non-pension savings significantly higher than they were before the pandemic.
Lowery adds: “Having exploded to a high of 27.4 per cent in spring 2020, as pandemic-restricted households spent less and saved more, the proportion of household income that is saved took a hit after restrictions vanished as people either saved less or dipped into savings. But the savings ratio has steadily increased since then to a rate that is significantly higher than the trend line of about 6 per cent seen in the years preceding the pandemic.
“With pension saving having remained fairly consistent, this increase is coming from non-pension savings, suggesting that many households have some leeway in their monthly budgets, as incomes have grown and inflation has fallen. Who knows, perhaps the experience of accumulating money in the bank during the pandemic has reminded many people of the security and satisfaction that a good buffer of savings provides?
“If so then for many households the next step will be to assess whether some of those savings are best diverted into pensions, where contributions will be boosted by tax relief.”
At the weekend the Government launched a ‘landmark review’ into pensions, vowing a “big bang on growth” to boost investments and savings that could boost an average defined contribution pension pot ‘by over £11,000’.
Following on from last Wednesday’s Kings Speech announcement of a Pension Schemes Bill, the statement said: “The work announced today – focusing on investment – is the first phase in reviewing the pensions landscape and will be led by the first ever joint Treasury and Department for Work and Pensions Minister, Emma Reynolds (Minister for Pensions). The next phase of the review starting later this year will consider further steps to improve pension outcomes and increase investment in UK markets, including assessing retirement adequacy.”
Lowery observed: “There are several things going on here: one is the new Government trying to co-opt private and institutional funds into its drive for economic growth by diverting assets into more productive investments. Another is an effort to improve retirement outcomes for savers. And then somewhere in the middle is the idea that consolidation of small pension schemes will assist in both aims, by lowering costs and increasing efficiencies.
“It will be interesting to see how DC pension savers’ funds are diverted into ‘higher growth investments’ and particularly into UK equities, private assets and growth companies. It sounds like the plan is to go further than Jeremy Hunt's Mansion House Compact, a voluntary commitment by some of the largest U.K. workplace schemers to allocate at least 5 per cent into unquoted, UK growth companies by 2030.
“After all, DC pension schemes usually present a choice of fund options to members and in the end it’s up to the saver where they put their money. There is a lot of inertia in this area, however, and if pension schemes alter the asset make-up of their main default and target date funds – which savers are usually funnelled straight into - then that will probably go some way to achieving the reallocation of savings. It’s a risky business though, as the authorities would have to be fairly sure that the switch in investments will in fact lead to better performance.
“With consolidation, let’s not confuse schemes and individual pots. The amalgamation of small workplace DC schemes to deliver cost and efficiency savings is a different thing to individual savers’ small pots being consolidated. Savers can have small pots within large DC schemes, or a large pot in a small DC scheme. If small schemes are encouraged to consolidate, are we talking about a “top-down” consolidation of the pots held within those schemes, up to a certain size? That would have to be handled carefully as savers might feel they are losing control over their pension savings.
“Consolidating small schemes might well enhance workplace pensions by lowering fees and improving investment choice and clarity of options, so that would be welcome. But helping savers to consolidate the plethora of small deferred pension pots that many accumulate, that is really separate issue.
“The estimate that all this will boost individuals’ pensions by £11,000 is intended to bring some life to the proposals but it’s ‘finger in the air’ at best, depending on a wide range of assumptions and contingencies. At the time of Hunt’s Mansion House Compact it was claimed this would boost the value of the average DC pension by 12 per cent.
“What would have a definite impact on pension savings and retirement outcomes is extending auto-enrolment by lowering the qualifying age to 18 and removing the lower earning limit – as has been recommended in a cross-party review - but this hasn’t yet been mentioned as part of the new government’s pension proposals. A step further would be to raise the minimum AE contribution rate.
“Employers might resist attempts to raise their minimum contribution, and many smaller firms would not welcome it - but it might not be so difficult to sell a higher minimum personal contribution to the public. First, AE has been largely a success and its introduction did not meet widespread resistance among the public.
“Second, the ONS data out yesterday suggests the UK might have adopted the savings habit after the pandemic turned many households, temporarily at least, into better savers.”
Scottish Widows Report 20th Annual Retirement Report
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