Middle Britain's Squeezed Middle
Middle Britain's Squeezed Middle
Pensions continue to be hot news (and personally I like it). But while the images of pensioners happily snow-boarding off into the sunset, or driving their Lambos around the highlands are very attractive the truth is that for many retirees the reality could be very different. The problem is that having enough to live on in retirement now falls mostly on the individual and most are just not saving enough.
Consideration of “Strengthening the incentives to save: a consultation on pensions tax relief” is therefore very timely. It is right that we stop and ask ourselves whether the present system works and, if not, what changes should be made. What we should not do is discard the proverbial infant and change things that do not need changing.
We can do more to encourage people to save for themselves but an up-front financial incentive is effective, so long as it is fair and properly understood.
As part of our Pensions Through The Ages research Royal London surveyed nearly 1000 people aged 18 - 29, and a further 1000 aged between 30 & 40, who should be halfway to saving for their retirement. Quizzed on their savings, pensions and retirement plans, backed up by historical and future data on spending and incomes in retirement, the report highlights some worrying attitudes to long term pension savings. Possibly the most worrying finding is that those aged 30 -40 - the core of today’s Middle Britain - are woefully underprepared.
While the median pension pot for an 18-29 year old is just £6,000, they have two distinct advantages over the older age groups. Firstly, three years of auto-enrolment have played a key part, encouraging younger savers to start saving. Consequently this younger generation are far savvier when it comes to understanding their current pension situation; just 15% weren’t sure of the value of their pension fund compared to 30% of 30-40 year olds. Secondly, they were also much more diligent on regularly reviewing their contributions, 64% had done so in the last year.
However the greatest benefit they have is the extra time available before they retire, allowing additional savings contributions and investment returns to boost the size of their retirement fund.
Looking at Middle Britain, 37% had not started saving for retirement and many were unaware of the income they would need in retirement. To match the lifestyle of an average pensioner today, the estimated average monthly expenditure of a retiree, who expects to retire in 2050, is predicted to be £2,764 per month.
Royal London’s research highlights that the current pension pot of those aged 30-40 was only £14,000 on average. Unless they take action now, Middle Britain faces a far poorer quality of life in retirement than today’s pensioners. Royal London has calculated that to secure that basic level of income they would need a pension fund of £666,000. Without the luxury of the additional time to save, they are facing an era of permanently tightened belts. Over half (54%) who weren’t saving said they couldn’t afford to. So what can be done to help this squeezed middle?
Given the level of savings needed to meet their income in retirement, Middle Britain should take advantage of the current incentives on offer. As auto-enrolment is extended across smaller firms, employer matched contributions will make up a valuable part of a person’s final retirement pot. As the government line goes: ‘when you pay in, your boss pays in too’. The importance of this cannot be stressed enough.
While the Treasury consults on potential reforms to the current pension tax relief system, more must be done to educate all savers on the benefits of tax relief in boosting a retirement fund. As we proposed in our response to the government consultation and based on the research findings, a flat single rate of tax relief at 33% (effectively £1 for every £2 you contribute) could have a significant impact on encouraging more people to save and to save more.
These incentives all play their part in encouraging people to save for the future. The squeezed middle receive significant benefits for every pound they manage to put aside. That said; emphasising personal responsibility to actively save is a must. 40% of Middle Britain doesn’t believe that the state pension will exist in the future and I don’t personally believe it will survive in its current form (which isn’t overly generous today). But this shouldn’t tarnish their golden years.
All savers should save a little, save often, and take advantage of the incentives available now. Regularly checking that their savings are on track to secure an income for a comfortable retirement is also crucial.
The best way we can help the pensioners of tomorrow is to educate and inform people of the task ahead and help them find the support they need to prepare for their own future.