PwC surveyed 1,200 working UK adults about their retirement plans and understanding of the pensions system and found that one of the biggest barriers putting people off saving more into their pension is that they don’t understand the system. Nearly six in ten (59%) people surveyed by PwC say their lack of understanding of the pensions system puts them off saving more into a pension. The impact is even higher for women (63%) and younger workers (64%). In addition, only 15% of those surveyed say that tax-free contributions are an incentive to save towards their pension.
The research reveals that people, on average, would like a retirement income of £22,200 per year. For 18 to 34 year olds, the target retirement income is £23,100. Londoners’ expectations are the highest, at £28,700 a year. But the majority of people won’t reach this level based on their current contribution levels.
The survey respondents are only saving an average of 5% of their salary towards their retirement and contribution levels are not increasing with age. Only one in 20 people surveyed are contributing more than 10% of their salary to their pension and this tends to be people earning over £100,000 a year. Average employer contributions according to PwC’s survey, are just slightly higher than employees at 6%.
For the pensions system to act as an incentive to save, PwC suggests it needs to simplified, use language people can relate to and include a broader package of measures than tax reform.
Raj Mody, head of pensions consulting at PwC, said:
“It is clear that many people’s expectations of their pension pot and the reality at retirement will be very different as people simply aren’t contributing enough to their pensions.
“Any system that is asking people to lock up their money for many years needs to be simple to understand, trusted and sustainable to encourage greater savings levels. It also needs to include a strong up-front incentive.
“Our survey suggests that the pensions system in its current form isn’t incentivising people to save.”
Philip Smith, head of defined contribution pensions at PwC, said:
“We see various routes to simplifying the current pensions system so that it acts as a much-needed savings incentive. One option is to introduce a single rate of tax relief on pension contributions. This may also cause less disruption to pensions, as the system is being tweaked rather than completely overhauled. Another option is a system where people are taxed on the money they put into their pension, but they receive an up-front contribution from the Government and their pension would be tax-free in retirement.
“Reforming pensions tax alone isn’t going to dramatically impact people’s motivation to save more towards their retirement. Efforts need to focus on improving saver awareness, increasing auto-enrolment contribution levels and improving financial education so people can plan for the retirement they hope for. The Financial Advice Market Review is an opportunity to make quality and affordable advice available for all and we believe technology should be at the core of the solution.”
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