Following the latest Work & Pensions Committee report, Protecting pension savers – five years on from the pension freedoms: Saving for later life, Jon Greer, head of retirement policy at Quilter has commented.
Auto-enrolment contribution rates:
“We’re now ten years on from the start of automatic enrolment into workplace pensions and the policy has undoubtedly proved to be a huge success. However, we know many are not saving enough and right now it is a hugely difficult time to discuss ratcheting up contribution rates given the cost-of-living crisis that is stretching finances in a way many have not experienced before.
“The greater risk is that people choose to opt out of funding their retirement in a bid to have more money in their pocket today. Auto-enrolment largely relies on people’s inertia but significant financial pressures on someone’s finances today may make people take action and reduce or stop pension funding altogether. As a consequence, workplace pensions are facing their greatest challenge since automatic enrolment was introduced as people are rightly concerned about the economic environment.
“We know that many in the UK are at risk of having inadequate savings to fund their desired lifestyle in retirement. This is particularly true of under-pensioned groups, who are less likely to have private pension savings to supplement their state pension and indeed may not have any private pension saving at all.
People in their 40s:
“People in their 40s are a generation who are uniquely under-saved. While they largely missed out on final salary pension schemes, auto-enrolled pensions also emerged relatively late in their lives. Now in their 40s, many are still likely to have dependents and in some cases are counting on an inheritance windfall to help fund their retirements.
“Unfortunately, that perception may not be the reality. With people living increasingly longer and the cost of care rising rapidly, the windfall is highly likely to be substantially less than they were expecting.
“The Work and Pensions Committee is right to draw attention to this group. However as is the case with younger people under-saving through auto-enrolment, the solution is not an easy one and particularly during a cost-of-living squeeze.
“The best thing to do is start planning as early as possible. Think about what kind of income you want in order to achieve your desired standard of living and then work backwards by projecting how much you’ll need in order to reach that target and finding a way to save toward that long-term goal. Inheritance should be treated as a bonus.
“While it comes as little surprise that self-employed generally have lower levels of pension savings, the situation is dire with just 16% saving into a pension. Comparatively, more than 80% of employees pay into a pension. And worryingly, the gap between employed and self-employed groups paying into private pensions has actually widened since 2006.
“While overlaying an automatic enrolment framework for the self-employed may work for the gig economy, it will be unpalatable for many small business owners who value personal autonomy highly. Income in self-employment moves with the market people operate in, which means they tend to favour certain products that do not lock away their money as pensions do.
“One potential solution, which has been trialed, is the pensions ‘sidecar’ model which aims to create an optimal level of accessible liquid savings on the side of a pension while maximising long-term savings. Ironically we are now entering an economic cycle that the sidecar model was designed for.
“Speaking to a financial adviser is the best way to get reassurance and peace of mind that you are on-track or, if you are looking at an income shortfall in retirement, to address the situation.”