The new Scottish Widows UK Pensions Report offers a major assessment of pension savings behaviour – and worrying confirmation that many Britons are facing a bleak future when they reach retirement age.
On the positive side, the fifth issue of the report reveals an overall improvement in levels of savings. These findings backed the figures released by the National Savings & Investments in March that the credit crunch has encouraged Britons to save more money.
The NS&I in this quarterly survey found that the savings ratio measured as a percentage of an individual’s disposable income had increased from 1.7 per cent of income to a historically normal level of 4.8 per cent – evidence that households were cutting down on consumption to pay off debts.
But these figures mask a less optimistic picture. Looking at the way Britons are catering for their retirement needs, the Scottish Widows survey found a hard core of approximately half of Britons (54 per cent) remain on course to enjoy an adequate retirement income.
Not surprisingly, 86 per cent of those who have access to a defined benefits scheme (final salary) are saving enough for retirement whereas this falls to only five per cent of those with no access to a pension.
The report also found around 20 per cent who do not save at all which is consistent with the Office of National Statistics showing around one quarter of households in the UK had no savings in 2006/2007.
These worrying figures have also been backed by a moneysupermarket.com survey published in March. This poll concluded that Britain is suffering a “savings crisis” after again finding that one in four adults have saved nothing in the past two years.
The poll also found more than a third (36 per cent) of Britons now have less money in their savings than they did in 2007.
There is clearly a need for a radical shift in behaviour and the introduction of personal (pension) accounts in 2012, which will introduce a new automatic enrolment regime, needs to be successful.
Income has always been a major factor in determining how well consumers are preparing for retirement. This year’s report shows a major change for those with earnings between £30,000 and £50,000 per year. It found 64 per cent of them are preparing adequately, a significant increase. There has been a more modest improvement among lower earners and little change among very high earners.
Age is also an important factor with older people more focused on providing for their retirement. Significant change in the 2009 report has seen increased levels of preparedness amongst 30 to 50 year olds (up from 46 per cent to 53 per cent).
With the UK pension population set to hit 12 million by 2020, this suggests around two fifths of them, nearly five million, will be entering retirement with insufficient means to generate an adequate retirement income in their own right.
Gender also has a major impact on levels of preparation for retirement – 59 per cent of men are on track for a comfortable retirement compared with 47 per cent of women.
It is suggested that saving 12 per cent of income is necessary to provide an adequate income in retirement. Whilst the average savings ratio for 2009 has gone up, an in-depth analysis of the results shows some worrying trends. Overall there are fewer people saving, but those who continue to save are saving more. Britain is still a nation divided by their savings behaviour.
There are interesting results in people’s attitude to retirement. Whilst the state pension age is set to increase to 68, the results indicate that Britons would be angry at having to work past 66.
An emerging theme from the survey shows that even the well-intentioned with the means to save will struggle to save 12 per cent of salary without some form of outside intervention. Usually this would be provided by employer contributions into a work- based pension scheme.
With the retirement income needs of UK households set to increase – as an increase in life expectancy means we can expect a longer period in retirement – the long term goal must be to increase the amount of income which is derived from private sources of income.
With 46 per cent of individuals still saving too little for their retirement, something is required to ‘disturb’ people’s behaviour. Reforms such as introduction of automatic enrolment and personal accounts may see some movement, but not enough.
Without greater awareness the engagement by UK consumers will continue to see shortfalls in provision. There has been much speculation that the current economic downturn will prompt changes in how people view retirement and how they plan for it. The recession will undoubtedly have an impact and people are likely to reassess their financial priorities.
The present difficulties in the residential property market will demonstrate to consumers the dangers of relying on property to replace pensions as a form of retirement savings.
The recent downturn in property values should have shown people the folly of treating their homes as a cash machine. With property values rising year after year, home equity loans may have seemed an easy route to obtaining more money.
But property dramatically ceased to be an appreciating asset and the sharp decline in house and apartment values in the past year has shown the starker reality they are a route to more unwelcome debt.
A decent pension scheme offers the most reliable route to a secure financial future in retirement years.
* Trevor Law is a director with Montpelier Group (Europe) Ltd, the privately-owned independent financial advisers located at Barston near Solihull. E mail: TILaw@montpeliergroup.com