A new report from the Institute of Fiscal Studies has laid bare a series of major challenges for the pensions industry – and for future generations of retirees. By Tony Watts OBE.
The report makes the case for a new review of the pension system in the UK. The authors say that there are key challenges facing future generations of pensioners that threaten their living standards in retirement and which, without policy action, mean many are likely to face substantial financial difficulties in older age.
This is the first report of a multi-year project that will examine the future of financial security in retirement. The final report, which will include specific policy recommendations and options, is planned for early Summer 2025.
1. Many employees are currently only saving very little for retirement. While this is particularly true of low earners who are below the threshold for automatic enrolment, there is also concern that 61% of the middle-earning private sector employees who are contributing to a pension are saving less than 8% of their earnings, and 87% are saving less than 15% – the level which would be more in line with what Lord Turner’s Pensions Commission thought appropriate
2. Fewer than one-in-five self-employed workers are saving in a pension.
3. Most private sector pension participation is in the form of defined contribution pensions which leave individuals bearing risks that are difficult to manage well. The fraction of private sector employees participating in a defined benefit pension halved from 24% in 2005 to just 12% in 2020.
4. Increasing numbers approaching retirement live in more expensive, insecure, private rented accommodation. This means they will continue to have housing costs to cover in retirement, and have no buffer should they wish to release equity in their home.
5. Higher state pension ages will pose difficulties for many, and longevity improvements have not been as big as predicted a decade ago. While the rise in SPA has not been accelerated, as was feared, this will still mean millions of people working into their late 60s, many in physically demanding jobs and with long-term health conditions.
6. Spending on state pensions and other benefits for pensioners is already projected to rise by £100 billion a year by 2070, with even bigger increases in health and social care spending. If the state pension age is increased as legislated, the share of adults over the state pension age is projected to rise from 24% today to 27% in 2050 and 30% in 2070.
7. Those retiring with defined contribution pension pots face considerable difficulty and risk in managing their finances through retirement. Currently, a man aged 66 is expected to live for a further 19 years, but 13% can expect to survive until age 95; the equivalent figures for 66-year-old women are 21 years with 20% making it to age 95. There are risks of running out of private resources or of being so cautious as to end up suffering a needlessly austere retirement.
8. While current pensioners are still doing well on average, and many of the recommendations of the Pensions Commission have been successfully implemented, the future looks risky at best for many current workers hoping for a comfortable retirement.
The Review will centre on three key questions:
- Are people saving appropriately for retirement, in terms of both the amount and the form of saving, and if not, how can government policies help?
- How should the state support people from late working life into and through retirement?
- Do people require more assistance to use their wealth appropriately through retirement?
What the review has highlighted is that:
- Many of tomorrow’s retirees are currently not saving enough to enjoy the retirement they have been hoping for, and many will not be able to use their property as a buffer as increasing numbers are renting;
- The State Pension will come under increasing pressure in the coming years, in turn putting pressure on the State Pension Age;
- Longevity will mean that many retiring with Defined Contribution Pensions will find themselves running out of funds.
As one of the Review’s steering group, Sangita Chawla, managing director at Standard Life, part of Phoenix Group, said: “The current pension system is under growing strain with a number of long-term pressures starting to build. With the onus increasingly on individuals to make complex financial decisions, particularly at the point of retirement, advice and guidance aren’t as accessible as they need to be and greater support is required to avoid people making costly mistakes.”
In particular, anyone heading towards retirement should ensure that they are have a firm grasp on the outgoings that their current rate of savings and pensions will allow in retirement and, a far as is feasible, make any adjustments. (This is possible with proper advice from an IFA, or by using an online planner such as LifePlan from AAA members RetireEasy)