As reported in the press recently, older people’s income has received a boost from private and workplace pensions in the last 40 years. In 1977, 45% of retired households received income from a private pension, compared with 80% last year. As a result, the income gap between those only getting the state pension and other pensioners had grown.
The Triple Lock Guarantee – Ensures the state pension increases in line with earnings, inflation, or 2.5%, whichever is higher.
What does the future look like?
Incomes in the last 40 years have grown thanks to final salary and defined benefit schemes, yet the next generations of pensioners are less likely to have access to this type of pension. Their pensions will be defined contribution schemes, which depend on the success of how much individuals save, how those savings are invested and how the funds are taken in retirement.
Automatic Enrolment entitles workers aged over 22 and under State Pension Age and earning at least £10,000, a workplace pension. Great news, but even with the phased rise in contributions in April 2018 and 2019 to a minimum standard of 8%, this is very unlikely to be enough to generate the pension incomes enjoyed by those with final salary or defined benefit pension benefits.
What’s to be done?
The cost of pension contributions is one of the highest costs for an employer. Some employers communicate the value of their pension provision well and a recent survey by REED showed that employees were more likely to stay with their employer if there was a plan that enabled them to retire with a decent pension income. However, after decades of employers ending their final salary schemes and the rise of defined contribution arrangements, employees are forced to learn the skills of a financial planner and investment manager. Building their pension wealth, making sure it grows and also knowing when to withdraw funds at a rate so that it lasts as long as they do.
Whilst employers are unlikely to spend more on contributions, they will get great value on supporting employees to understand how to prepare themselves in retirement.
If person understands that setting aside a little more does add up over the years and using methods such as save more tomorrow techniques and salary exchange, they have the chance to improve value. After all, if a person gets to a point that they are financially independent and can afford to retire, why wouldn’t they?
Source: Office of National Statistics
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