THE majority of today’s workers underestimate how long they are going to live and are failing to save enough for their future.
For many pensioners the burden of funding their retirement has fallen to their employers and the state, with companies taking responsibility for making sure all promises made under final salary pension schemes are met.
As people are now living far longer than was expected when these promises were made, the cost of running such pensions has spiralled, leading most employers to offer current employees so-called money purchase pensions instead.
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Rather than paying retired workers a proportion of their salary for life, with the employer taking responsibility for ensuring there is enough in the collective pot, money purchase pensions see both the employee and the employer contribute to an individual pot, which is handed to the pensioner at retirement.
Dr Patrick Ring of Glasgow Caledonian University pointed out that while the onus is on each individual to make these pots last from retirement until death the reality is that few people are saving enough to be able to do so comfortably.
He said: “The Government has done the auto-enrolment thing, which is fine and has got an extra six million savers coming in, but at the moment the minimum contribution is two per cent [half each from the employer and employee] and that will go up to eight per cent [three per cent from the employer, five per cent from the employee] in 2019.
“It’s agreed that that won’t be enough, but the concern is that auto-enrolment has been established by the Government under legislation so people think ‘if the Government think I should be saving eight per cent that must be a reasonable amount; they wouldn’t be saying that if it wasn’t enough’ - but it isn’t.”
Steven Baxter, head of longevity innovation and research at consultancy firm Hymans Robertson, agreed, pointing out that part of the problem is that people “fundamentally underestimate how long they are going to live for and are therefore undersaving into pension arrangements”.
“A man underestimates it at the point of retirement by five years and for women it is eight years,” he said. “As many as three in four people are unlikely to achieve their desired outcome in terms of when they can retire and how much they will have as retirement income.
“Those individuals can either realign their expectations about when they can retire – but how do we ensure they’re healthy and can work later in life – or they can save more.”
While some employers will pay considerably more into their staff’s pensions than the minimum required by Government, many are required to pay so much to fund deficits and meet liabilities on final salary schemes that they are skimping when it comes to money purchase payments.
Margaret Meehan, a partner at law firm Burness Paull, said: “A lot of employers are stuck with the legacy of final salary schemes and with people living for longer that goes on for much longer.
“Actuaries are making assumptions that people will live to 100 so employers have to divert money to those schemes.
“With many final salary schemes it is to pay for people who have long gone from the company but companies are having to divert their interests and money towards them.”
Not only is up to the individual to make sure they save enough over their working life, but it is also their responsibility to make sure they spend their pot wisely, with pensions freedoms introduced by former Chancellor George Osborne meaning people can access their savings from age 55. Previously all money purchase savings had to be used to buy an annuity, which paid an income for life, but now pensioners can spend their cash exactly as they choose.
While this is generally seen as a good thing, particularly as annuity rates have offered poor value for money, the fact that few people are sufficiently financially literate to make informed decisions means that many could be left short when they enter late retirement.
“Auto-enrolment is set up on the basis that you don’t have to do anything – you join an employer and they automatically take money from you and you don’t have to think about funds because it will go into their default fund,” Dr Ring said.
“But when you get to the other end there are all these pension freedoms. There’s a real dichotomy at the different ends – coming in you don’t have to think about it but at the other end there’s a shed load of decisions to make.”