Identifying the big challenges with regards to saving for retirement
by Dr. Ros Altmann
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The inadequacies of UK retirement savings have been well-documented. Estimates of the ‘Savings Gap’ run into many billions of pounds. It is clear that people have generally lost confidence in pensions and, in many cases, they simply do not want to engage. Even when there is an employer contribution on offer, workers often still decline the chance to join company pension schemes.
This leaves millions of people at risk of an impoverished old age, trying to survive on just a state pension and perhaps means-tested top-ups in later life. In order to overcome the challenges of pensions inadequacy, it is important to recognise what the barriers to pension saving really are.
Firstly, the state pension system itself undermines private pension saving. As nearly half of pensioners end up entitled to means-tested Pension Credit when they retire, pensions could be an unsuitable investment for significant numbers of workers, especially those on moderate incomes who cannot be sure they will not be means-tested in retirement. Pension Credit will take away much or all of any private pension income, so many people will be better off saving in an ISA, rather than a pension.
Secondly, many people have so much debt, or such inadequate incomes relative to the lifestyle they want to achieve now, that they feel they just cannot afford to put money into a pension.
Thirdly, incentives for pension saving, other than for top-rate taxpayers, do not seem that attractive. Many younger people, who may end up on higher rate tax in future, particularly those in debt, who do not already own a home, could find that they will be better off not contributing to a pension at the moment. Better and clearer incentives are needed.
Fourthly, the level of house prices has been a problem for pension saving, with many younger people finding housing so expensive and having to take on so much mortgage debt, that they cannot afford to put money into a pension as well.
Fifthly, the nature of the pensions vehicle itself is a problem. Pensions are- a ‘locked box’ – this is both a strength and a weakness. Of course, the fact that people cannot access their money until later life has the advantage that they cannot spend it before retirement and it should be there in future to help support their old age. However, the disadvantage is that for many young people contributing to a pension feels like having their hard-earned money ‘confiscated’ from them and put into an investment which charges fees each year, may or may not do well and even if they desperately need the money, they cannot get it back. This puts them off contributing in the first place.
Finally, with such high levels of debt among all age groups, it is not clear that pension saving should be their first priority, but if they do not start saving early and getting into that habit, there is a risk they never will. All these factors, along with successive scandals over the years and the complexity of the whole system, have led to inadequate retirement savings in the UK.
Identifying the possible solutions and new ideas for closing the savings gap
Rename private pensions: Pensions really need an ‘image makeover’, in order to help people feel more positive towards the idea. The word ‘pension’ often has negative connotations nowadays. It conjures up the image of being old, which many people resist and my first suggested solution is to rename private pensions. We should abolish the word ‘pension’ for anything other than what the state pays people in their old age.
Radically redesign state pensions: As the Government is proposing to radically reform the state pension, paying a decent flat-rate minimum of £140 a week in today’s money, future generations will eventually be able to understand that there is only a certain amount they will get from the state. The rest is up to them and if they want more, they will have to do some saving. We can then come up with more creative savings vehicles that will be called something other than ‘pensions’.
Design more flexible products – for lifetime savings: The industry could design more flexible products, for ‘lifetime savings’ which will help people save for their old age but have some access to their money if they really need it. This would help people contribute or put in more in the first place.
Lottery: I would like to see a lottery attached to these long-term savings too, so that anyone putting money in would be entered for a prize of, say, £1million, each month. That taps into the psyche of many people who probably want to feel that there may be something in it for them today, not just in some very distant future.
More use of insurance: There is clearly insufficient attention being paid to the need to insure against very bad outcomes in later life. Whether it is insurance against illnesses that curtail earnings or insurance against the need for expensive long-term care, it would make sense to tie in pension provision with an insurance overlay.
In conclusion, there is an urgent need to rethink pensions and both Government and the financial industry have crucial roles to play in helping individuals prepare for a better retirement. Pensions alone, however, will not solve all the problems faced by our ageing population and it will be essential to help people plan to work longer – preferably part-time for a number of years – as well.