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."
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