New pensions environment is creating 'perfect storm' for retirement planning – report
Many people working today are set to be disappointed with their income in retirement according to a new report from Saga Investment Services.
Massive changes to the pensions environment mean that a swiftly growing group of people urgently need to take an interest in their financial futures and have a plan for making their money work hard for them.
The report compiled by the Centre for Economic and Social Research (Cebr) on behalf of Saga reveals that defined benefit (DB) pensions – based on final salaries and years worked - are fast disappearing in the private sector. Instead employees are being offered defined contributions (DC) pensions, in which savings contributions are invested to build up a retirement ‘pot’ to turn into an income.
According to the report ‘The Future of Pensions’, the total number of active DC pension members is expected to overtake the number of DB pension members by 2018.
Active members of DB private sector pension schemes fell by two million (56% of total) between 2004 and 2014, while the number of members of defined contribution private sector pension schemes increased by two million (167%) from 1.2 million to 3.2 million.
And of the 2.5 million entrants into private sector occupational pension schemes in 2014, 2.4 million (94%) invested in defined contribution pensions.
However, many are likely to be contributing too little to their pension pots to enjoy what many would consider to be an acceptable standard of living in retirement. Average employee contributions to DC pensions, at 1.7%, were just over a third of the 4.9% contributions to DB schemes, and even with planned increases in minimum total pension contribution rates typical total rates are likely to remain much lower.
At the same time Cebr warns that many individuals are probably underestimating the amount of savings that they need to fund their desired lifestyle in retirement. If a healthy 65-year-old purchases a single inflation-linked annuity today for £150,000, it can be expected to yield a retirement income of less than £4,7001 in the first year.
Nici Audhlam-Gardiner, managing director of Saga Investment Services said: “The report underlines how vital it is for people to plan to plan better for their retirement, to know how much is in their pension pots and to understand their financial needs when they finish working.
“Many working today will enjoy good living standards, benefiting from high levels of wealth including property investments and solid pension incomes, but for those who have not planned well in advance could risk a lower than expected level of living in retirement.
“And we know that not enough people are planning – a recent Saga report revealed that only 30% had begun a retirement plan with only 3% saying their plan was definitely on track.”
“The challenge the report identifies is stark. For those earning £25,000 over a 25-year period with salary increases around 2.5% each year and making today’s typical DB contributions they will have contributed close to £180,000. But those on a typical DC contribution rate their total would be just £40,000.
“These losses are even greater when considered against the returns on investment associated with a pension. The result is the DB pension-holder would have a pensions pot five times greater in value than the DC pension-holder.”
Nici continued: “This issue has been intensified by the introduction of auto enrolment which has produced a significant increase in the number of active members of pension schemes, rising from 10 million in 2014 to 18 million by 2020.
“Millions more workers in the UK will have an occupational pension – the vast majority of which will be DC schemes. These conditions are creating a perfect storm with a need to provide pensions advice and planning on a scale never before seen.”
Paul Green, Director of Communications at Saga said: “All this adds up to a looming pensions crisis, unless the underlying issues identified in the report are addressed.
“Saga has recently written to the Chancellor of the Exchequer to requesting two things. Firstly, a simplification of the current rules with the abolition of the annual and lifetime saving limits. Secondly, clearer and fairer incentives for people to save for a pension - with taxpayer matched funding on personal contributions up to particular limits. These measures would attracted more people to save and would give a greater incentive to those who most need to save to have a better future.”
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