How to solve Britain's growing pension crisis
With life expectancy rising, and cutbacks to public spending, it's time to get a financial plan ready your retirement.
Saturday 04 June 2011
An ostrich generation of Britons are failing to take responsibility for funding their retirement despite the certainty of a longer life without the generous state and company pension schemes of the past.
The latest Future of Retirement report from HSBC has found that people expect to ease into semi-retirement in their mid-50s before stopping work at an average age of 62 – regardless of the fact that some 17 per cent of the 1,000 adults questioned don't know what their main source of retirement income will be and a further 21 per cent say they will rely on the state pension.
But those who don't bury their heads in the sand enjoy a significant financial and emotional premium, the bank found, as the 39 per cent of people with a financial plan have retirement savings worth more than four times those of non-planners.
"The emergence of this ostrich generation is a real concern," says David Wells, head of investments, pensions and savings at the bank. "Britons know that they need to plan and save more for their retirement, but they are failing to turn this knowledge into action."
So just what should be done to promote a savings culture? We asked pensions experts and providers for their top 10 ways to solve the country's growing pensions crisis.
An image overhaul
Ros Altmann, director-general of Saga, the financial services company for the over-50s, and a former pensions adviser to the Government, believes "pension" has lingering negative associations with scandal and disappointment. "'Pension' has become a negative word and it should be used only for the money paid to you by the state," she says. "The rest are your own savings for your own future and should be called something else."
Increase the fun factor
Altmann also suggests introducing lottery prizes as a way of incentivising people to save for their retirement. "We need to make pensions more fun, perhaps with a lottery prize of £1m every month to get people interested," she said. "Many young people play the National Lottery each week hoping for a win, but their pound is gone. Many others have premium bonds hoping for a big prize, but they earn nothing on their money. With a pension lottery prize, people would still have their money, would get extra from tax relief or even employer contributions and would also have the potential for investment returns."
The cost relative to current spending on pensions marketing would be small, she admits, but offering savers the potential of big gains today, not just in the future, could reinvigorate long-term savings.
The state pension system should be reformed, so there are few or no means-testing penalties, according to our panel.
"People aren't incentivised to save, because those with income below a certain threshold qualify for full state benefits, while those who exceed the limit see their benefits reduced or even removed," says Alasdair Buchanan, head of communications at pension provider Scottish Life.
"The problem is that income from private pension savings is taken into account when calculating some of these benefits. As a result, an individual who responsibly decides to save then loses some means-tested benefits and could end up with the same overall income as someone who hasn't saved at all."
Government plans to introduce a flat-rate pension for everyone, of around £140 a week by 2016 should address the issue, he says.
People must be encouraged to save as much as they can for as long as they can, with as few savings breaks as possible, adds Patrick Connolly, head of communications at independent financial adviser AWD Chase de Vere. He believes that the National Employment Savings Trust (NEST) – a national pension scheme into which all employees will be automatically enrolled from 2012 – will help many more people to save at least something for their retirement. UK employees will be automatically enrolled if they earn more than £7,475 per year and have been with their employer for at least three months.
Until 2016 the total annual contribution will be at least 2 per cent of an employee's earnings above £5,715, of which the employer pays in 1 per cent. From October 2018 employees must pay 4 per cent into the scheme, with another 4 per cent being made up by 3 per cent from the employer and 1 per cent in the form of tax relief from the Government.
However, Connolly wants the scheme to go further. "We believe that pension contributions need to rise significantly more than this to provide many people with a meaningful income in retirement."
Encourage longer working
But part of the solution also has to come from part-time work in later life, says Altmann. "This means people's pensions would need to work less hard and don't need to replace all their earned income for as long as people are currently trying to make them do."
Allow greater flexibility
Many people are dissuaded from contributing to pensions because the money is tied up for decades with no early access, even in an emergency. With access only available from 55, Altmann recommends allowing people to tap into their pension when they want to, but only their contributions, not their employer's or the tax relief.
"In the case of NEST, people would still have half of their pension fund growing until retirement, even if they needed to draw out the other half," she says.
Integrate pensions and debts
Kate Smith, regulatory strategy manager at insurer Aegon UK, believes integrating pensions with other financial responsibilities would make saving for retirement attractive even for those with significant debts.
"Employees could request a pension payment holiday so that their pension contributions (minus tax relief) are diverted to repaying a consolidated loan for example, ideally at a reasonable interest rate, for a maximum period, say five years," she suggests. "Existing savings would remain untouched, the employee could switch back to pension saving after the period, or once the loan is paid off – encouraging staff loyalty, good saving habits and raising awareness of financial responsibility."
Link pensions and ISAs
ISAs and pensions could be linked to encourage longer term saving, suggests Fidelity International, by linking the new £50,000 annual pension limit and the ISA limit of £10,680 to form a single annual tax-advantaged savings limit.
Up to £30,000 per year could be placed in the ISA, and the remainder in the pension. At any point, when an individual feels comfortable not having access to their savings until retirement, they could transfer their ISA savings into the pension, netting tax relief. "Behavioural economics research shows that if you want to get investors to take an interest in long-term savings, you have to make it very, very easy for them," agrees Tom McPhail, head of pensions research at financial adviser Hargreaves Lansdown.
"Every time you introduce a pointless bureaucratic rule it just puts people off. If the Treasury allowed investment assets to be moved between different tax shelters it would help reinvigorate retirement saving at no cost to the taxpayer."
Communicate more clearly
The Government must also address the public's lack of awareness about increasing longevity and the effect it will have on retirement income.
"Previous generations typically spent 10 to 15 years in retirement," says Buchanan. "But current life expectancy for a man at state pension age is 21 years, which means many may live for 30 years or more in retirement. This message needs to be strongly communicated."
Financial Services Authority regulations that act as a barrier to allowing employers to promote their pension schemes more effectively should be removed, says Smith, at the same time as jargon is eliminated. "We need to get rid of the jargon," she says. "Information provided to pension savers needs to be simplified; too much information is bewildering and off-putting."
Take the politics out of pensions
An independent cross-party committee is necessary to drive pension reform, says Connolly. "Pensions have been a political football for many years and this has impeded necessary long-term reform," he says. "The decisions that need to be taken are unpopular, such as increasing pension contributions and raising the state and public sector retirement ages.
"Politics needs to be taken out of pensions. The solutions required will need to stretch across many parliamentary terms and if short-term political popularity remains a distraction then we will continue to see further tinkering around the edges of the problems rather than meaningful progress."
- 1 This is what the one in ten British men who pay for sex need to know
- 2 Lee Evans announces retirement from comedy on The Jonathan Ross Show
- 3 These grandmas smoking weed for the first time are wonderful
- 4 Woman opens professional cuddling shop – gets 10,000 customers in first week
- 5 Angelina Jolie confuses everyone with 'ay up me duck' East Midland's greeting to Derby actor Jack O'Connell at awards show
'Muslims pre-date Columbus in discovering America,' says Turkish president Erdogan
Former Tory PM Sir John Major says 'we would not have an NHS without migrants'
France 'blocks' Russian sailors from boarding a warship
G20 summit: David Cameron warns Vladimir Putin that Russia's relationship with the West is at a 'fork in the road' over Ukraine
Myleene Klass: Ed Miliband 'strikes back' by comparing UK's need for Labour's mansion tax to Hear'Say track
Coalition government has 'shifted money from poorest to better-off' through welfare cuts and tax reductions, study claims
iJobs Money & Business
£20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...
£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...
$175 - $200 per annum, Benefits: full benefits: Carlton Senior Appointments: P...
Not specified: Carlton Senior Appointments: Senior MD Financial Advisor - San ...
Day In a Page
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens