Retirement Choices: No perfect answer

Chris O'Brien

Associate Director

IFF Research

When conducting focus groups or interviews with consumers, retirement saving is not usually front of mind for them. It’s off far away in the future, and there’s plenty of other priorities for their earnings. From holidays to buying a house, most people’s attention is focused on more immediate concerns. However, our job as researchers is to dig beneath the surface, and when it comes to retirement, for this generation there are plenty of underlying issues which should be worrying Government and the wider industry.
Firstly, there is the understanding about how best to save for the longer term. This tends to be boiled down to three core options; put money aside in savings, grow a business or other asset (e.g. buy-to-let) or put money aside in a pension (usually through their employer). Unfortunately, there is no perfect answer, and there are issues with each of these approaches.
Although it would be wonderful to believe that everyone under the age of 35 is going to be quietly putting money aside into their upcoming lifetime ISA to grow their nest egg, it’s just not going to happen. The overall savings ratio (i.e. the percentage of disposable income that is being saved on average) is, as of December 2016, at 5.6% across the country. So, overall there’s a low level of saving (combined with high levels of personal debt), and what is being saved is most likely being prioritised for other areas like trying to get on the property ladder.
Growing a business has a high level of risk involved. There’s no guaranteeing success and millennials relying on this alone could potentially end up with nothing.
Finally, there’s saving into a pension. Thanks to automatic enrolment every employed millennial is now defaulted into a DC pension scheme, meaning that at least saving is now happening despite a lack of interest in the pensions industry. However, when you weigh up the decrease in average wages, and the fact the current default saving contribution is a whopping 2% (1% staff, 1% employer), there is a very real concern that final pension pot sizes are not going to be sufficient. At the moment, the minimum income standard for retirement is estimated at £9,050 per year. However, the state pension for a single man will provide around £6,200, creating a shortfall of £2850. Based on current annuity rates millennials will require pension savings of £70k to make this up. At the moment, the average pot size at retirement is miles off this at £25k, nowhere near the amount needed. In addition to this there is still a very real lack of trust in financial institutions, and cynicism in their desire to work on behalf of customers rather than seeking just to increase their own profits.
Quite obviously, we need to help people save more, and start doing it earlier.
What is the industry doing to help?
The good news is that the industry is taking some steps to try and tackle the issue. Automatic enrolment contributions are going to increase over the next few years, so pension savings will start to increase from that perspective. The other element is to increase engagement from younger people earlier.
One method of doing this is the new drive to create a pensions dashboard. This would be a simple online dashboard provides a simple summary of all pension schemes that someone has saved into, making information and a broad overview of progress easier to obtain. Companies have now been appointed to create the dashboard and the government feel that a working prototype will be designed by Spring 2017. The theory is that having a simple summary will lead people to take a more active interest in their pension, with a view to potentially increasing contribution rates.
Another clear way of improving engagement is to simplify the language used to describe available products. It is a constant refrain in consumer research that the language used by financial providers is arcane and unnecessarily complex. The minute a provider starts talking about ‘crystalizing the partial value of your fund into a flexible-access draw-down product’ you’ve lost them. The ABI is taking some steps to address this by drawing up language guidelines, but there is still much further to go to make financial products understandable for the majority.
To address the issue of trust the industry must work towards lower, more transparent charges fees and costs on pensions savings. These are the largest drag on savings values, and infuriate customers, especially when fees are taken despite the value of the fund going down thanks to stock market volatility. The FCA has conducted a review of fees and charges, but there is plenty more work to do in order to reduce fees in reality.
Finally, workplaces need to provide a greater level of support for their staff, and prompt them to improve their engagement. Automatic enrolment means that a pension must be provided for all, but there is no corresponding legislation around further support for employees. Employers are usually seen in a more favorable light that a faceless financial company, and consumers are likely to be far more open to information coming from their employer.
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