Retirement looks 'more like a pipe dream'

retirement savings jar©

Retirement could become a pipe dream unless people at least double the amount they save in their pensions, a report has warned.

At the moment the average employee saves just 4.7% of their salary in their workplace pension - with employers typically adding a further contribution of less than 4%.

However, the Independent Review of Retirement Income (IRRI [pdf]) suggests people need to save at least 15% of their salary every month to get a "decent sized pension pot" for retirement.

Extensive overhaul

The 588-page IRRI report, the result of an independent two-year review commissioned by the Labour Party, proposes a raft of measures to improve the way we save.

These include setting up a single pensions regulator that would be able to - among other things - tell people exactly which retirement schemes were dependable.

"There are now far too many poorly designed and expensive choices of product available at retirement," say the report's authors.

They voiced concern that, since the pension freedoms were introduced, many people are being exposed to risks they don't really understand and spending money unwisely.

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Professor David Blake, chair of the IRRI and director of the Pensions Institute at Cass Business School, says that, "nobody knows what a good outcome looks like since the pension freedoms".

Although that's likely to change as things settle down, he has another stark warning for those of us who'll make up the next cohort of pensioners:

"The danger now is we will have a generation who really can't afford to retire."

The IRRI say that saving 15% of lifetime earnings should immediately become a national savings target in order "to avoid future pensioner poverty".

Saving by default

As it stands, many of us are contributing the minimum required through the Government's auto enrolment scheme.

This can be as little as 2.0% of our qualifying earnings - which in practice means 0.8% of our pre-tax salary, together with 0.2% in tax relief from the Government, and a 1% contribution from our employer.

This situation will improve a little in the coming years when the minimum contribution will increase to 8% in total.

But, as Royal London have pointed out [pdf], previous generations paid around 20% of their wages into old-style final salary pensions.

They say that someone hoping to retire with two thirds of the income they had before retirement would need to start saving at 22 and work until they were 77 if they only contribute at the statutory minimum level.

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But that's assuming we can contribute at a steady pace for the whole of that time - which for many of us just isn't possible.

Women are particularly affected in this respect, as they may take time out to have children and only return to work on a part-time basis.

Indeed, a report [pdf] from the Trades Union Congress (TUC) reveals that women fare particularly badly when it comes to pension savings.

On average, they have just £7,500 saved in defined contribution pension schemes, compared with £14,500 for men; in final salary schemes, women typically have £32,000 in savings, while men have £62,900.

The TUC also say that women are also more likely to opt out of workplace pensions.

Opting out

While enrolment is automatic, it is possible to voluntarily opt out - as long as it's done within a month of enrolment.

A small-scale study of 46 employers by the Department for Work and Pensions found that the opt-out rate among the automatically enrolled has increased, from 3% one year to 12% the next, while a 2015 report [pdf] from the Pensions Regulator puts the opt-out rate at 10%.

The worry here is that people are opting out because they prefer the short term benefit of the extra salary.

They say that "workers' reasons for opting out tended to relate to their financial situation" - in essence, those who opt out often need the increase in salary despite the long-term benefits of contributing to a pension.

This isn't surprising, given that a fifth of working-age adults without children are living in poverty.

The Government hope the introduction of the National Living Wage will begin to change this when it's introduced in April 2016, and to some extent it will: a wage increase will translate to higher pension contributions each month.

But this is irrelevant to people excluded from auto-enrolment, such as carers, the self-employed, the disabled, and people earning less than £10,000, who the TUC say are "particularly likely to have... lower than average levels of pension savings and income".

The introduction of the National State Pension (NSP) in April 2016 should go some way to reduce the inequalities in pension income experienced by the so-called "un-pensioned" groups.

This is mostly because the new flat rate scheme will eventually do away with additional state pension - but many will continue to rely on means-tested benefits,particularly those who haven't made enough National Insurance contributions to qualify for the full NSP.

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While saving something is better than saving nothing, many late starters risk having to work well into old age or, indeed, never being able to retire at all.

For example, someone starting to save at 45 would need to work until they were 81 if they wanted to retire on two thirds of their working life salary.

The problem for those hoping to work in old age has traditionally been the lack of jobs and the unwillingness of employers to take on older staff.

But as the number of older people is forecast to grow, with a corresponding decrease in the number of young, it's becoming clear that this will need to change.

Indeed, the number of over-65s in work has already started to rise. In 2015, 1.14 million of them had jobs - an increase of 39,000 on the year before.

This trend will continue as the age at which people can draw a state pension moves further back.

Tom McPhail, head of retirement policy at Hargreaves Lansdown says that: "Those joining the workforce today are likely to find themselves waiting until their mid-70s to get a payout from the state system."

For their part, the Government is hoping that people can be tempted into working beyond the increasingly distant qualifying age for the state pension.

They've said that anyone deferring their state pension will increase it by an increment of around 5.8% for each year of deferral.

The Government will announce the results of a review of the state pension age in May 2017.

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