YouGov Retirement and Pensions Survey
by Dr. Ros Altmann
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We are hearing so much about the issues of Work, Retirement and Pensions Policy these days, and policy is being seriously re-considered at the moment. We have had umpteen reviews of lots of different aspects of these subjects, reform is on the agenda. What I hope to do this morning is help you understand how all of this fits together, using some of the evidence we have found in this nationally representative survey and my many years’ experience of analysing and informing UK retirement and pensions policy.
SLIDE 2 ‘Where do we begin?’
We have a Green Paper coming up soon and, if we are going to get this right, we need to look at all these issues as a whole – joined up thinking and joined up reforms. I hope to help you put everything in context. And the first thing I want to tell you is that, starting with pensions policy is not the right place to start!
SLIDE 3 ‘A Different Perspective’
We need to start with people – society as a whole – you and me. This is about people and their lives.
Rather than sitting in Whitehall and deciding what is best for people, we felt it would be useful to actually find out what they think. We surveyed the whole country, men and women, all age groups, all income groups, across the social divide, employers as well as workers, retired as well as those not retired. Well, it’s absolutely clear that they think there is a crisis and that policy for dealing with this should be urgently changed. But, if policy proposals are to be properly informed, they really should take into account how the people in this country feel and look at the evidence that we have found.
SLIDE 4 1950’s Lifestick
Current policies for retirement and pensions were devised over half a century ago. People would stay at school till they were about 15, work till they were about 65 and then, if they were lucky live for about another 10 years (many didn’t live more than 5 years more). Overall people were spending abut two-thirds of their lives working full time and the other third not working at all.
SLIDE 5 1950’s Lifestick and ‘Now’ Lifestick
Nowadays, people are often staying on at school till they are 18, then working till they are around 60 (this is the upper retirement age for the public sector, for example) – only a third of men are still working when they are aged 65 – and they are living till they are at least 82 or so. This means that they are now spending about half their lives working and the other half not working.
SLIDE 6 All three Lifesticks
As for the future, the trends show the proportions falling further. Our Survey and others show that people want to retire earlier and longevity is continuing to increase, so people are going to be spending only about 40% of their lives working and contributing to their own incomes and to the economy as a whole. This seems rather a waste of resources and will, inevitably, harm long term growth in the UK. But, even if this is what people want, how will they be able to afford a decent standard of living, what will they live on in thier 50’s, 60’s, 70’s and beyond. Have they really thought this through? Can we really expect that just saving more will do the trick? Pensions were never meant to last for 30 years or more!
SLIDE 7 ‘Income in Later Life’ Private and State
Well, the income can come from two sources – our own private income, or from the State i.e. the taxpayer.
SLIDE 8 ‘Income in Later Life’ – Earnings
An obvious source of income as we get older is still the same as when we were younger – that is, our earnings from work. People used to stay at work until State Pension Age, but nowadays only about 30% of people do this. So earned income at older ages is falling.
SLIDE 9 ‘Income in Later Life’ – Employer Pensions
Maybe our employers will still support us when we have stopped working. Employer pensions have been pretty good in this country (much better than most other countries) but final salary schemes are now closing, money purchase contributions are being cut and employers are feeling less paternalisitic in this era of individualism.
SlLIDE 10 Income in Later Life ’employer pensions smaller
So employer pensions are going to get smaller.
SLIDE 11 Income in Later Life – private pensions/other savings
But maybe we could live on our own private pensions or other savings. However, Stakeholder pensions have not really taken off, the savings ratio is at an all time low, annuity rates have fallen, investment returns have fallen, so these sources of income are also falling. In other words, all private sources of income have been falling, while more and more people are living longer and spending more time out of the workforce, so what will they live on?
SLIDE 12 Income in Later Life – BSP
We, we have the State pension system of course. We all have to pay National Insurance to fund the Basic State Pension (so we already have compulsory contributions!). But Mrs. Thatcher decided to cut the cost of this by linking it to prices, not earnings, so the Basic State Pension is falling behind and declining as a percentage of average earnings. But the Labour Government of the 1970’s introduced an extra pension which is linked to earnings.
SLIDE 13 Income in Later Life – SERPS/S2P
This was called SERPS (and has now been renamed S2P). But SERPS proved too expensive, so the benefits were cut. Also, many people have been encouraged to contract out of this, again to cut costs, but they have often gone into private schemes which have not performed so well, so this source of income is falling too.
SLIDE 14 Income in Later Life – Means Tested Benefits
Which means that State pensions have also not been keeping up with our needs, so there is a third element of State support which people have to rely on – this is means tested benefits.
This Government has introduced the Minimum Income Guarantee or MIG, which will soon turn into Pension Credit (PC) and this will ensure that today’s pensioners won’t live in poverty. There is also a whole range of other benefits (housing benefit, council tax benefits and so on) which are means tested too. The MIG and Pension Credit are great policies for people retiring now, who have not got enough private income, who didn’t save enough, early enough. Everyone over 60 can get it, men don’t even have to wait till they are 65.
But, as the number of older people grows and other sources of potential income in later life shrink, more and more people will end up on these means tested benefits.
SLIDE 15 Income in Later Life – Means Tested Benefits larger
Next year, 57% of pensioners will be entitled to means tested benefits and three quarters of older single women will be. Of course, there are problems with means tested benefits, they are expensive to administer, people don’t like them, take up is low (about a third of those entitled don’t claim), but the biggest problem is that means tested benefits actually discourage people from trying to provide for themselves. Even with the Pension Credit – which is wrongly billed as ensuring that ‘it always pats to save’ people could lose all their savings (if they don’t have a full basic state pension, which most women don’t, they lose all of the first part of their savings, just as they would do now). At best, people will lose 40% of any private pension income they have built up. But, I have to leave this aside for now, because it’s not something that the Survey focussed on. However, it is clear that we are going to need to try and stop more and more people needing to get means tested benefits in the first place.
SLIDE 16 Income in Later Life – Incentives
And that is where we come to pensions policy!
Why do we have pensions policy? Why is it important? Well, apart from the usual benefits to the economy that come from people saving, such as higher investment and long term growth, the idea of pensions policy is that it should encourage people to save enough while they are working, to be able to support themselves when they stop working. So Government wants to encourage people to have pensions, so they don’t have to rely on the State. State pensions policy just takes money away from today’s workers to pay pensions of today’s pensioners, but what Government really wants is to encourage people to put money aside for their own future, or encourage employers to do this for them. To do this, Government needs to give people incentives.
SLIDE 17 Income in Later Life – Earnings bigger
The first incentive might be to encourage people to work more, to get higher earnings and therefore be able to save more and be needing to live on a big State pension for less time. There are incentives to delay drawing a pension if people are still working, but these are not generous enough to make it worthwhile deciding to delay.
SLIDE 18 Income in Later Life – Employer Pension bigger
The main incentives used are in the form of Government giving money to people, or to their employers, while they are working, to help them provide for their future and it wants them to lock that money away and not be able to touch it until they retire. This money that Government gives, is in the form of what we call tax relief. This is the system we have always used to provide incentives for employer pensions, private pensions and other forms of saving. Like so many other things that don’t really make sense when you start to think carefully about them, this form of incentives doesn’t make much sense either. It’s also clear from our Survey that the majority of people in this country don’t understand tax relief and, if they did understand what it actually does, they wouldn’t be in favour of it at all.
SLIDE 19 Income in Later Life – Private pension bigger
Essentially, the way tax relief works, is that anyone who is earning over £34,000 or so, gets 40p from Government for every 60p they put into their pension. This means that, for the top 10% of taxpayers, there is a pretty big financial incentive to put money away for their future. For anyone not earning quite so much, even if they are earning £33,500 or if they are among the other 90% of taxpayers who don’t happen to pay higher rate tax, Government doesn’t feel that they needs quite as much incentive to put money away for their future. So they only get half as much as the top earners into their pension. Even if they contribute the same amount of money as the higher paid, middle Britain will only get about half as much from Government into their pension plans.
But, of course, the idea is that everyone should be encouraged to put money into their pension, or indeed other savings, and this is so that the cost of means tested benefits falls and doesn’t spiral out of control.
SLIDE 20 – Income in later life – means tested benefits smaller
So this is the aim of policy and this is how it all fits together. Now, our Survey has tried to take a detailed look at most of the aspects of this issue. We have covered work, pensions, retirement and incentives and tried to find out how people feel, what they think, what they understand and draw implications from this for policy. After all, these policies affect each and every one of us, not just the top or bottom income groups. The findings of the survey were in many cases quite surprising.