A casual glance at the UK’s much-overhauled pension system might lead one to conclude that it’s moving in the right direction. There has certainly been no shortage of major revisions in the past few years, in both the state and the private pension systems.
The rolling out of the auto-enrolment means the number of employees saving into work-based schemes that are boosted by employer contributions has risen dramatically, from 42 per cent in 2012 to 78 per cent by March 2016, according to the Pensions Regulator. The introduction of pension freedoms in April 2015 has given people greater flexibility in the way they generate retirement income from their pension funds. And the complex two-tier state pension system has been simplified and enhanced with the move in April 2016 to a flat-rate pension of almost £160 a week.
But a slew of unsettling news over the past month suggests there is absolutely no room for complacency on anyone’s part. The latest OECD report on pension provision and reform across the organisation’s 35 member states highlights the stark fact that full-time workers on average wages and reliant solely on the UK state pension will see their incomes fall by more than 70 per cent when they retire. That is the greatest drop among all the OECD countries; the average fall in income is just over a third, while in Turkey the state pension is actually marginally higher than average full-time earnings.
Among the UK’s low earners the differential is less pronounced; the state pension provides an income worth just over half what they earned in work – but that is still very low in comparison with the other countries surveyed. Only Mexico and Poland’s low earners are worse off in retirement relative to their working lives.
The UK’s position should improve over coming years as the new single-tier state pension, which will boost the state pension rate by 30 per cent, is phased in. At present, however, many people at retirement do not qualify for the full payout, and it won’t apply to everyone until 2024.
A recent scheme that gave people the chance to top up their state pensions by making extra national insurance contributions brings into sharp focus the challenges facing the government in its efforts to ensure people don’t lose out. Not only was take-up embarrassingly low, but those who did top up were not the low earners who would have really felt the benefit from a state pension boost. Instead it was wealthier people, in a position to put in much larger sums than the government had expected, who capitalised on the offer. Good for them, of course, for taking advantage of a government giveaway, but the scheme’s overall failure does raise big questions about how best to reach out to those most at risk of retiring into poverty. It also underlines the fact that if you aren’t sure how you’ll find money to repay payday loans, fix the boiler or replenish the electricity meter, it doesn’t matter how generous the pension top-up offer is – you won’t be participating.
The fact is that different countries’ pension systems put different emphasis on the responsibility of the state versus that of the individual for ensuring older people can live comfortably. In the UK, as the OECD report makes clear, the main focus is increasingly on the private pension system. Workplace and personal pensions make a relatively big contribution in comparison with other OECD states, boosting overall retirement income for the average earner to just over 60 per cent of their working income, which doesn’t sound so bad. The recent introduction of auto-enrolment has pulled many people into the private pension net, but so far the amounts being saved are pretty tiny – certainly not the stuff that a carefree retirement is made of. Those figures are set to rise this April and again next year, but fears have been raised – including by the OECD – that these contribution hikes will prove too much for low earners hitherto borne along by inertia, causing opt-out numbers to start rising significantly.
Pension Dashboard hopes
Ultimately, both for those whose pensions will be built on the autoenrolment scheme and for older generations approaching or in retirement, engagement is key. In the UK’s self-reliant environment, they need, somehow, to be kick-started into caring about their pension and wanting to encourage it to grow, whether that’s by regularly increasing contributions or by wise investment choices, or both.
It will be interesting to see whether the Pensions Dashboard, scheduled for introduction next year, will help in that respect. The idea is that it will enable people to see at a glance how the various strands of their pension, both state and private, are shaping up, and how much retirement income it will all translate into. If users can easily click through to good guidance on simple steps they can take to boost their prospects, the Pensions Dashboard could turn us into a nation of pension enthusiasts; but I’m not holding my breath.
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