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David Sinclair: Young, free and single – who cares about retirement cash?
THIS year marks the 100th anniversary of the first state pension payment. To qualify for the state pension in 1909, you needed to reach 70 to receive up to five shillings a week. Life expectancy was much lower back then, and few of the early recipients lived for a long time after receiving their first pension payment.
The numbers have changed significantly since then. Only 500,000 people received a pension in 1909, but with us all living longer and the pension age falling, there are now more than 12 million pensioners. This year alone, more than 700,000 people will reach state pension age and receive a basic pension of 95 (for single people), which is topped up for those with no or limited other sources of income (by pension credit) to 130.
Yet despite the increasing frequency of news stories highlighting that one-in-five pensioners live in poverty, we are not saving enough for our retirement. A survey published earlier this year revealed that half of adults between the age of 20 and 60 are not saving for their pensions. The under-30s were least likely to be saving, with only about 36 per cent putting towards a pension scheme.
And even of those who are saving, a significant proportion aren't saving enough to ensure a comfortable retirement. One survey exposed the fact that more than half of those who do save aren't actually putting away enough to ensure a comfortable retirement.
So why is it that despite the real risk of poverty in later life, many younger people are not saving for their future?
Saving for a pension has never really been the first choice for young adults, and it is clear that there is a strong "live for today, save tomorrow" mentality among this group.
Recent research for the Department for Work and Pensions noted that many younger people have few financial responsibilities and their lives revolve around social activities. In effect, many younger people prioritise spending over saving.
But the issue is not simply younger people wanting to have a good time rather than save for the future. At a time when the increasing level of student debt is a major and growing problem, and where the next priority is to get a foot on the housing ladder, it is understandable that they don't prioritise pension savings. And, of course, some see that owning a house is a key part of retirement planning.
Another barrier for many is the perception that the amount they could afford to save in a pension would be too small to be worthwhile. Yet the earlier people save (even relatively small amounts), there is significant long-term benefit.
One of the questions younger people often ask is "how much do I need to save?" There is no right answer, but some advisers say that as a rough estimate you should take the age you start paying your pension and halve it, and put this percentage of your salary aside each year until
you retire.
Using this formula, someone starting to save for a pension at 32 would need to save 16 per cent of their salary for the rest of their life. But, if you start at 20, you would need to put just 10 per cent of your salary into a pension.
Research highlights that many younger people do believe that saving is a good thing but have negative stereotypes that those who have saved are "misers", living austere lives.
Another part of the problem is the negative image many younger people have of old age; there is frequently a perception that old age is a boring and bleak time and not worth thinking about.
And, of course, a detailed (or even basic) understanding of different types of pensions and how they operate, is not something which many people have. If you don't understand pensions, then why would you put your money into one?
There is also a disincentive for some younger people to save in that pension saving may simply pull them above the levels which allow them to qualify for means-tested benefits. But at the same time, many people assume that the pension will give them a higher income than the reality.
And, finally, across the whole of the population, the distrust in the financial services industry is a major challenge for pension saving.
It's not a challenge helped by the various crises over the last couple of years. A Trust Index, produced by Nottingham University Business School on behalf of the Financial Services Research Forum, revealed that those aged between 25-35 years show significantly lower degrees of trust in financial services.
So what can be done?
There are a number of initiatives which could help encourage younger people to save into a pension. The Government (and private sector) interest and investment in financial education and generic financial advice will certainly help.
A big factor influencing whether younger people save is the attitude of the employer to pensions. Research has highlighted that an employer offering a pension scheme to which they made a contribution was perceived to be the greatest influence in encouraging someone to start to save. So there is a major role for employers.
Younger people are also heavily influenced by positive examples set by friends and family, and getting in the saving habit early is very important. There is at least one provider (Virgin) which offers pensions for children.
The Government will introduce personal accounts with automatic enrolment. Taking the hard work out of how to start to save will undoubtedly increase the number of people saving for their future. At the moment, the individual has to make a conscious choice to sign up – in the future, people will have to make the choice not to.
In producing his influential report(s) on pensions in 2004/05, Lord Turner set out some likely scenarios for the future. He noted that we will have to retire later (the state pension age is now set to increase to 68 and may well go higher); we will have to save more; we will have to pay more tax, or we will have more poorer pensioners. The reality is that some combination of these will happen.
What is clear is that if we don't see a change in habits and if younger people don't save for the future, they will face retirement on a much lower income than they have been used to.
The state pension alone is unlikely to give today's younger population an income to meet their expectations.
David Sinclair is head of policy and research at the International Longevity Centre. It is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change.
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Tuesday 07 February 2012
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