Andy James, head of retirement planning, Towry
“The Department of Work & Pensions (DWP) has recently issued its scenario analysis of future pension income. This looks at the adequacy of funding for future retirement incomes. Whilst this does make for some sobering reading it also offers a level of hope for the future.
“On the downside, they estimate that almost half of adults below state pension age, 12.2 million people, are not saving enough for their retirement. The bulk of these ‘undersavers’, nearing 75%, are in the earnings band between £22,700 and £52,000. Unsurprisingly, those at the lower end of the earnings spectrum are better protected by the state pension and therefore only make up 17% of the total. The higher earners meanwhile, as would probably be expected, are a smaller proportion of the overall group yet they are still significant at 10% of the total.
“The good news, as such, is that of this total group, the DWP estimates that only 8% are substantially undersaving and would have less than half the income they would need in retirement. Around half of the number is in the ‘mild undersaver’ group where shortfalls are not too daunting and thus relatively easily addressed with future planning. The rest are ‘modest undersavers’ where more dramatic action may be required but where it is probably still feasible for them to achieve suitable financial goals with effort.
“The analysis notes the beneficial effects of the triple lock on state pensions, the new single tier state pension and automatic enrolment on the overall savings figures. These changes are estimated to have removed about 1 million people from the undersaver list.
“It is therefore important that auto-enrolment opt-out rates are kept at low levels to ensure this benefit is maintained. Meanwhile, as any removal of the triple lock guarantee would also lead to a large increase in undersavers, there needs to be caution in government if this is being considered. Removing the current triple lock guarantee with future increases simply rising in line with earnings, for instance, would have a significant long term effect on numbers and cause notable issues for retirees in the 2040’s and beyond.
“If increases in the new state pension starting value can be found it would have a major positive effect. Each additional £1 per week would remove 110,000 people from the list.
“The simple remedy is of course to pay more contributions. The bulk of the middle income earners would see great benefits from relatively small increases in contribution rates. For those at the top end a pension saving rate of over 15% of earnings would be necessary to achieve an adequate retirement income. Certainly that could be achieved – at a push – for some.
“Although the analysis looks at a number of scenarios which could have positive and negative effects on the overall savings position it does not consider the new legislation that will allow pension funds to be inherited. It is acknowledged that current retirees and those moving close to that stage of their lives are the wealthiest of all generations, and future retirees will not be in such a comfortable position. Therefore if these wealthy parents can give their children and grandchildren a pension fund to top up what they have themselves we may well see better figures in years to come.
“The new announcements relating to pension death benefits were more generous than many expected. The ability to pass on a pension tax free if death occurs before age 75 even if benefits have been drawn will help some. However as most retirees will live beyond this age it is the ability to pass the pension pot on as a future income supply to the next generation, that will radically change the landscape. Any inherited pension can be used for income, and income tax will only be paid on withdrawals made by the beneficiary. Any unused inherited pension can again be transferred on death further down the generations.
“This change has already caused retirees to rethink their estate planning tactics. The previous normal process of draining pensions and leaving other assets within the estate, and therefore potentially subject to inheritance tax, may no longer be the sensible route. If you have previously made plans to reduce your tax bill on death, now would be a good time to review it.”
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