Saving for Retirement – the challenges ahead

Gone are the days of gold-plated defined benefit and final salary pension schemes for all but a few private sector employees. Many public sector employees have seen their pension entitlements trimmed as cash strapped local authorities and public agencies seek to re-negotiate pay packages and benefits. Every day it seems we hear of massive pension black holes in public companies. Successive Governments from the late 1980s have tinkered with the pension legislation. We have witnessed the decline of final salary schemes, dreadfully poor return on annuities as interest rates remain stubbornly low, annual and lifetime tax-free allowances cut back, the rise (and perhaps) fall of self invested and administered pension schemes and more recently pension freedoms, which on the one hand have sparked a greater interest in the tangible benefit of a pension, but on the other have led to scams and frauds.

According to a recently published annual report by leading pension provider Scottish Widows, one in five people believe that they will never be able to retire. The report does, however, reveal that saving for retirement has jumped this year and that some 59% of workers over the age of 30 are saving adequately – which means saving at least 12% of their annual income. This is a record figure since Scottish Widows’ first edition of the report was published in 2005. Some 12% are saving something, whilst 44% of the ‘adequate’ savers are still in defined benefit schemes. Roll back the years and that figure would have been double.

The impact of compulsory workplace pensions (auto-enrolment), introduced some seven years ago, is now being felt. It is “the engine of progress”, according to the report and “is perhaps the single most transformative retirement policy that has been implemented in the UK”. After a previous decline in pension scheme participation there has been a sharp turnaround, as nearly a third of the working population have been automatically enrolled, according to The Pensions Regulator and the Office of National Statistics.

The report’s Adequate Savings Index finds that the proportion of those not in a defined benefit scheme, but saving, has risen substantially since 2007/08. The ASI shows that its mainly younger people saving more – up 18% for those aged 22-29, but also those aged 60-69 who are saving 7.5% more now than eleven years ago.

The challenges ahead

Whilst this rise in saving is undoubtedly good news, there are more underlying concerns about how we will afford retirement. Earnings in real terms are still below those earned before the credit crunch. Although we are told that inflation is low, nudging two percent, try telling that to would be house buyers, commuters, pub goers, council tax and utility bill payers and motorists. Their costs have gone up many times more than 1.9% per annum over the last decade.

The Resolution Foundation tells us that the average UK salary is £26,000, and although unemployment sits at 3.8%, the lowest for half a century, does this really help us understand how to plan better for saving towards retirement? Disposable income is the lowest it has been for a long time. There is still a long-term savings gap, particularly for those saving for a deposit to buy a house and for the huge number of self-employed as well as those on zero hours contracts who haven’t, and can’t, make any pension provision. Of the low paid, 24% cannot afford to save at all. Of the self-employed, at least 15% of the UK’s workforce, 37% have no pension, and 41% expect no income in retirement, and 19% never expect to retire!

The housing crisis, affordability of housing and the need for a substantial deposit, coupled with low wages has caused a perfect storm that no other previous generation experienced when contemplating home ownership. Retirement savings could be used to help buy a property the Scottish Widows report concludes. Otherwise, it is the Bank of Mum and Dad, that prospective home-buyers will need to turn to.

Other storm clouds are the increase in state retirement age and the spiralling cost of care for the elderly. Some £14.7bn is the amount patients with dementia have spent on their own care in the past two years. Patients would need 125 years of saving to pay for dementia care if saved at the same rate as a typical pension; according to the Daily Mail. The latter is particularly scathing of successive Governments’ inability to solve the social care crisis. Dementia sufferers have been betrayed, cries the Mail. Since Tony Blair appointed Frank Field as pensions minister in 1997 and asked him to think the unthinkable and reform pension legislation – which he did; and was fired, we have had Royal Commissions, the Sir Andrew Dilnot’s review of 2011, Mrs May’s proposed dementia tax, the six times delayed social care green paper on the proposed state-backed insurance scheme and others, all changing the face of saving for care.

What we do know is that a long-term savings policy needs to be agreed that includes everyone. The population face a long retirement and pricey care home costs as we live into our nineties and beyond.