New pension won't feather your Nest
Auto-enrolment scheme is good news, but it may not give everyone a comfortable old age
Sunday 31 October 2010
The figures are truly shocking. An estimated eight million British workers are saving nothing for their old age, relying, it seems, on the basic state pension, one of the least generous in the Western world.
The National Employment Savings Trust, which will launch in just over a year, is designed to get these people into the saving habit.
Millions of workers will be auto-enrolled into Nest it was announced last week, changing forever the landscape of UK pensions. However, our analysis reveals that the new scheme is far from a guarantee of a comfortable retirement, with potentially substantial shortfalls in store for those who leave it too late and save only the minimum amount.
Nest, the name the Personal Accounts Delivery Authority has given the trust, is to be phased into workplaces over four years from 2012 to 2016, with between three and six million individuals set to be enrolled.
The aim is to raise pension savings among low earners who would not normally have access to a company pension scheme. Of the 1.2 million employers expected to use the scheme, the vast bulk – around 800,000 – are expected to be small or "micro" firms, with around five or fewer members of staff.
Workers aged 22 years or older, earning above £5,732, will be automatically enrolled if they do not already have pension provision, and while staff will have the right to opt out, employers found coercing them to do so could be fined up to £50,000 and face criminal prosecution.
As it stands, employees will make a minimum 8 per cent contribution to the scheme, 4 per cent out of their salaries, 3 per cent from their employers and 1 per cent in tax relief. But, in a sop to hard-pressed businesses, employer contributions will be phased in between 2012 and 2016.
On the face of it, the scheme is good news. The latest Office for National Statistics figures show that the number of people saving in workplace pensions fell last year by 300,000 to 3.3 million, and the latest research from AXA's bi-annual global retirement research reveals that only two out of 10 people aged between 25 and 34 have a personal pension, and less than four out of 10 have an employer pension plan, so any initiative that kick-starts saving is to be applauded.
However, two recent studies, by the Cass Business School and the Joseph Rowntree Foundation, show that to avoid dependence on state benefits in old age an individual needs a retirement income of just over £14,000. Mike Morrison, the head of pensions development at AXA Winterthur, says the findings ring true: "They are in agreement that for a basic but acceptable standard of living you would need £14,400 annually, or £1,200 per month."
According to the Consumer Financial Education Body's Moneymadeclear site, a 20-year-old earning a salary of £20,000, who contributes 8 per cent for 45 years, would have generated £484 monthly income. Topped up with the basic state pension (£423 a month) it would give them a monthly income of £907, or £10,884 a year.
However, for people aged 30 and above the picture is gloomier. A 30-year-old who contributes 8 per cent will end up with £734 per month, or £8,808 per year. A 40-year-old would accrue £608 per month. For people in their 50s and 60s, the 8 per cent minimum contributions look even less adequate. Of course, returns on investment can alter, as can annuity rates. What's more, couples receive a higher state pension than individuals, and, as a career progresses, so does income. Still, 8 per cent is not going to be anywhere near enough for most.
Robin Ellison, the head of strategic development, pensions, at law firm Pinsent Masons, says: "Saving 15 per cent per year is the absolute minimum people need to think about."
Tom McPhail, a pensions expert at IFA Hargreaves Lansdown, agrees that 8 per cent is: "A starting point. As your career progresses, so should your contributions into Nest."
However, Mr McPhail warns that Nest's investment strategy will be low-risk, which may be good for those nearing retirement but less so for younger savers who can afford to take risks in the hope of higher returns. "You won't get nasty surprises with Nest, but it will be the lowest common denominator investment strategy," he says. "I'd advise people to look at other pensions and savings to supplement Nest. There is a possibility that, after five years, savers will be able to move their money out of Nest into other pension schemes."
But those on below-average incomes for most of their career may struggle to take Mr McPhail's advice:
"If you are on £20,000 and making a 4 per cent contribution , that is a lot of money," Mr Ellison says. "Is it better value to save this in Nest or use it to pay off a credit-card that charges 15 per cent interest?"
While generally positive about the scheme, Dr Ros Altmann, the director-general of Saga and former Downing Street adviser, said flexibility and the initial 2 per cent charge on employee contributions needed improving. "There needs to be a warning to people about the 2 per cent fee and the need to stay in for longer," she says. "Also, with people in their 20s, it's hard to know whether they should be saving into a pension or paying off student loans. You've got to kiss that money goodbye for decades."
But Tim Jones, the head of Nest, said there was nothing to stop individuals contributing more to their pensions. "The vast bulk of people who will come into Nest are currently saving nothing, so what they save into Nest will be a significant contribution to a better retirement."
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