Many of the baby-boomer generation retired well-funded by final salary schemes, with some beginning their retirement as early as 50. Today, however, this is a pipe dream for most of us. Retiring in the traditional sense will be the preserve of top flight footballers, lottery winners and some of those lucky enough to still have a guaranteed defined benefit scheme.
We urgently need a pensions market that will help individuals create a flexible, viable savings pot so that not only is there ‘life after work’, but there is a chance of there being ‘life when you need it most’.
This means simplifying products and making them more cost-effective and meaningful. It will also mean changing some of the rules around the options at the point when people decide to ‘retire’.
But most of all it needs a sustained push on all fronts to change ingrained beliefs about what life after work will really be like for the vast majority of us.
The ‘you save, you retire’ model needs to be well and truly put out to pasture. Long-term savings must be simpler and easier to understand for the mass market, more flexible in terms of how and when customers draw on them, and offer some protection to the hard-pressed saver’s measly pot.
For example, people may need access to funds well before their official retirement date if they become sick and unable to work, or at a point much later than the current definition of retirement date, if they are fit and able and keep working. Our pension provision therefore needs to support possible periods of inactivity through illness or part-time working and do so well beyond the usual age of retirement.
Our current situation is riddled with inefficiencies and anomalies. For instance, the fact that many of us accumulate several pension pots as we move from one employer to another is not just inefficient but more than likely creating poor customer value in leveraging investment returns. I suspect few of us know whether bringing those pots together is allowable, achievable or truly going to be in our interests. I believe the ‘pot follows member’ debate has only one answer:
The pension pot should follow the individual from one employment to the next. How we reach that situation cost-effectively is already the subject of some debate in the industry, but we should prioritise it as an objective.
Then there’s the business of encouraging people to save more in the first place.
Auto-enrolment will hopefully go some way to increasing people’s willingness to save. Early indications are that take-up is good and opt-out rates low. Employers are playing a vital role here, helping to explain how important it is to save for our later years. But they also need to provide adequate pay that is not only enough to live on now, but to help people save adequately.
At a macro level education and advice is needed to help individuals come to terms with what a low return would look like for their later years. For example anyone wishing to retire on the equivalent of the national minimum wage would need a total accumulated pot well in excess of £200,000. Putting this into context the average defined contribution scheme accumulated pot is currently around £30,000*.
Providers certainly have a big role to play in helping hard-pressed consumers save more. In an industry that has a rich heritage of opaque remuneration in distribution, complexity of infrastructure and unintelligible product features, I believe providers need to continue working hard to simplify, and reduce transaction costs and unwieldy charging structures. This would give a significant boost to the final value for most defined contribution individuals.
And what happens when a customer wants to ‘retire’ from work either partially or completely? Buy an annuity or keep invested and draw an income? Either way, the apparent ‘fairness’ (or not) of what to do with any unspent pensions savings is a thorny issue. I believe transfer of any ‘unspent’ assets to dependants would benefit customers and probably reduce the burden on the state by creating greater long-term financial security through generations. It should not be the case that the winners are the annuity provider or the tax man.
And this is such a long-term issue that it needs long-term consistency of approach from Government and Regulators. They must create an environment where the subject of long-term savings is given the debate and airtime needed, unconstrained by short political timeframes.
In summary, we must wake up to the fact that as a nation we are woefully under-saved for ‘life after work’. A well-funded later life will mean letting go of some of the fantasies we hold about old age and facing up to the realities of our increased life expectancy and changed working lives. This will only be possible if providers, politicians, employers and individuals all play their part.