12 million people not saving enough for retirement
Almost 12 million people are failing to save enough for their retirement, the government has warned. In a wide-ranging new report on pensions, it says 11.9 million individuals are "saving too little", but could get back on the right track with only "modest changes".
Pensions minister Steve Webb said that, of the 11.9 million, almost half are at least 80% of the way towards achieving their retirement income target, while only 8% are less than 50% of the way there.
"While the state will always provide a decent safety net so people can get by, anyone wanting to see their standard of living maintained into old age needs to make their own provision too," Webb explained.
"This new research shows that by saving just a little more, a huge number of working people could make their future retirement so much more comfortable."
Webb said that people are under-saving due to three main reasons. Some do not have a full work history, meaning they miss out on years' worth of contributions to workplace pensions as well as National Insurance contributions that count towards the State pension.
Many people fail to contribute to private pensions while they are in work, and those that do are not saving enough in private pensions.
In March, chancellor George Osborne announced that the government would give retirees far more flexibility with their pension from April 2015, including no longer having to purchase an annuity. Instead they will be free to take their funds as a lump sum, use income drawdown or go down the annuity route. Or a mixture of the above.
Webb said this will help to boost pension saving. The government research also looked at tweaking the contribution rates on workplace pensions. Under auto-enrolment, which was introduced in October 2012, the statutory minimum workplace pension contribution rate is 8% (including a minimum of 3% from the employer). The government researched raising the minimum to 12% or 15%.
At 12%, it found that 600,000 fewer people would be under-saving, while at 15% 1.1 million fewer people would be under-saving. But the government acknowledged that if it raises the minimum contribution rate by too much, lower-earners might be forced to opt out of workplace schemes entirely.
Patrick Connolly, a certified financial planner at IFA Chase de Vere, said: "Although it may seem like a long way off, the sooner you start saving the easier it will be to give yourself a more comfortable lifestyle in retirement. Even if you cannot afford to save much initially it is better to do something than nothing.
"Make sure you've joined your company pension scheme. Most company schemes provide good value, especially if your employer also contributes on your behalf, as all employers will need to do shortly as auto enrolment is rolled out fully."
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.