It’s not your imagination
Your parents and their generation arranged retirement saving so they could cease work in their early 60s, then retire in their own home with an adequate income to enjoy life and cover expenses. Why does this seem so unattainable today? Are you expecting too much? Maybe not.
A 2022 study by the Pensions Policy Institute examined the state of the UK pension system, using data through 2021. Specifically, it looked at the interactive relationship among three main factors of the pension system: adequacy, sustainability, and fairness. Before looking at their findings, these terms must be defined in the context they use them.
Adequacy – Defined as a clear system that enables people to plan reliably for a retirement that provides protection against poverty, financial resilience, and the ability to maintain living standards from working into later life. Or, simply, can people afford to retire?
Sustainability – Defined as a stable, secure and affordable system which allows the needs of the present to be met, without compromising the ability of others to meet their own needs. Or simply, can the government and policy providers afford the programs?
Fairness – Defined as an inclusive system which engenders trust, provides fair benefits for all, protects people equally from risk in retirement, and upholds the commitments that are made within and between generations. Or simply: can everyone afford retirement?
Adequacy and Sustainability are two sides of the same coin
Adequacy and Sustainability are two sides of the same coin, where improvements in one negatively affects the other.
The types of pensions available to workers have changed dramatically. A Defined Benefit (DB) pension is based on the worker’s salary at the end of their career and the length of time they worked for their employer. Workers are paid a secure income for life that increases each year in line with inflation.
Depending on the DB, workers can pay, or must pay, into the scheme. But it’s the employer who mainly contributes to the scheme and is responsible for ensuring there’s enough money at the time you retire to pay your pension income. They usually continue to pay a pension to your spouse, civil partner or dependents when you die. The DB scheme is offered mainly through large companies and the public sector.
In the past, retirement saving was easier as workers’ benefits often included a Defined Benefit (DB) pension. The DB is optimal for individuals because more than half of DB savers received employer contributions of over 20% in the period 2018-20.
But, this type of pension has become much less common thus making retirement saving . The report notes that just one in four employees have access to DB coverage and the rate is falling for all age groups.
Pensions have shifted to Defined Contribution (DC) plans. Here, the pension pot is based on how much the worker pays in. In DC plans, just 3% of workers received the same employer contributions as the DB workers did. Workers rarely have the security and employer management of DB plans now.
Since 2012, the government and employers have added ‘automatic enrolment’ for workers who meet eligibility requirements. This program automatically creates a pension pot for the worker and takes the mandatory contribution from the worker’s salary. The employer also puts a percentage into the pot.
Auto-enrollment has helped to increase DC coverage among employees to 49%. Generally, these changes helped to improve The Overall Private Pension Coverage (public and private provision) which extended to more than three in four workers in 2021. However, one in five employees and four in five self-employed workers are still not saving into a pension of any kind. And, although overall employment is high, one in four workers does not qualify for a workplace pension at all.
While the government auto-enrollment program has helped workers start and continue to save for retirement, it places the burden directly on the worker to save the vast majority of the funds.
The report confirms that the changes made to the UK pension system, enacted to improve affordability for the State and employers – which makes the program more sustainable over time – have done their job. However, making the pension more affordable for the system has shifted the financial burden to individuals.
Because of this, individuals now have a much more complex task to organize their own retirement. They also face the impending threat of having saved too little to support their retirement goals. And, disparity in incomes – affecting workers’ abilities to save at all – and access to employer contributions have risen.
Fairness of retirement status is affected both by the existing inequalities between population groups and by the recent changes and reforms in the pension system.
Women, single pensioners, ethnic minorities, the self-employed, low-income workers, and those with low levels of financial literacy, are likely to be most at risk of having dangerously low savings for retirement.
People from some ethnic minority backgrounds have rates of retirement savings below those of the white population, by around 7% for black people, 13% for Indian people, and 25% for Pakistani and Bangladeshi people.
Differences also exist between age groups, especially in relation to housing. For most people, home ownership is key for lowered living costs in retirement, as their homes are paid for. But home ownership rates are falling.
Home ownership among people over 65 remains near a record high of more than 80%, and almost one in ten pensioner households also owns a second home. However, rising property prices and mortgage interest rates are driving down home ownership among working-age groups. Just 65% of 45-to-64- year-olds owned their home in 2020-21, compared to 81% in 2003-4.
Report Card: Retirement Saving “Somewhat Fails” to support adequacy
Overall retirement saving (affordability) is relatively low and just one in three households meets income targets for a moderate standard of living. Although adjusted disposable household income does not appear to fall substantially as people reach State Pension age, growth in retirement income has been slow and uneven, most pensioner incomes are below the target level for a moderate standard of living, and rates of UK pensioner poverty are high by international standards.
So, no, you are not imaging that it’s harder for your generation to secure a comfortable retirement than it was for your parents. The solution? Visit a financial advisor early in your working life. Learn how to save smartly and consistently and reduce your risk. Be involved in your savings plan and pay attention to changes in the system. And remember, it’s not only a concern that the government can afford retirement plans; you must ensure you can afford your own retirement.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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