The government recently announced that it intends to bring forward the increase in state pension retirement age to 68 in 2039.
More important than the date was the fact it is also adopting the principle that the state pension should be payable for 32% of the period of average adult life. The government, however, will not legislate for this change until after it has carried out a further review of longevity in 2023.
In the same week as this announcement, the International Longevity Centre (ILC) published a report saying younger people needed to save 18% of their earnings to obtain an adequate pension. This was the headline but the ILC also wrote that it is necessary to save 20% if they were to match the living standards of today’s pensioners.
As part of the pension freedom consultations, in July 2014, the government stated that the earliest age at which pensions could be accessed would increase from 55 to 57 in 2028, the same date when the state pension age is due to increase to 67.
This access age will increase in line with increases in state pension age. Therefore, in 2039 we should expect that the earliest age at which pensions can be accessed will increase to 58.
So in an uncertain world we now have certainty. The state pension age will increase in line with a formula based on longevity, the amount required to save into private pensions has been quantified at a level that only a minority of the population are reaching, and the age at which an individual can access their pension will increase in line with the increase in state pension age.
Ever changing world in which we live in
None of the above is in legislation. Which leads me to ask, just how uncertain is all this certainty? The government’s change of course and increases in longevity may slow. The other uncertainty is the changing world in which we live.
For example, 50% of school leavers go into further education. Will those who do not, be prepared to work continuously from 16 or 18 until they are close to 70 or beyond? Without a generous employer how will those who do go into further education be able to pay 18% or 20% pension contributions, plus repay their student debts, buy a home, raise a family, etc?
With the pace of technological change how will the workplace change? How many people will need to completely re-educate themselves in their 40’s or 50’s to be able to obtain employment for the remainder of their working lives? How many will want to take a sabbatical to recharge their batteries before the final push of working through to 70 or beyond?
Private pension savings are the ideal vehicle to fund further education and sabbaticals later in working life. The latter could slow down cognitive decline, enabling more to work longer. However, governments of all colours seem unwilling to introduce such flexibility at present.
It is against this background that pensions have to compete for every pound earned. They are the best way of building up wealth for later life when the associated employer contributions and tax relief are taken into account.
The Association of British Insurers presents this well – based on auto-enrolment contribution amounts: “You put in £40, your pension contribution becomes £80”. This reminds me of the 1960’s TV game show ‘Double your Money’.
However, our customers need to live. They have families to raise and houses to fund. Unless they have a generous employer they are unlikely to get anywhere near 18% pension contributions, let alone 20%. Currently, according to the ILC, only 12.4% pay more than 15% into their pensions.
The implication is that many will have to work forever. This is a dangerous road to go down. If this becomes the perception no one will save into pensions.
Pensions are not the be all and end all. We need to help consumers to put what they can afford into pensions but also to do that in the context of enabling them to enjoy their lives and meet their other goals. This requires helping them to make wise financial decisions that will help them to add to their financial wealth.
Pensions have therefore got to be flexible in the contributions they accept, and to make them more future proof; they need to be able to finance adult education needs and possibly mid-life sabbaticals. Where an individual has excess earnings we need to help them to decide how best to put them aside for their future.
Safe as houses
We should not overlook that the biggest purchase most make is their house and that will eventually form part of their retirement planning. It is a poor decision to say my house is my pension, however, realising how your home can help build wealth that could be used to augment pension savings should not be dismissed.
It is also a poor decision to put all your spare earnings into a pension whilst paying excessive interest rates on a credit card or a car loan. That just eats into the potential of future wealth creation. A balanced approach is required.
The holistic retirement income market is growing rapidly. If the ‘certainty’ of recent developments prevails, this growth will continue and increase as more reach retirement with pensions savings that will not satisfy the retirement they wish for.
Bob Champion is chairman of the Later Life Academy
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