UK pensions: millions need help

The most important things in life are not always easy. Take pensions. With the onus now firmly on individuals to work out how best to manage their pension pot, millions in the UK are being set up for a fall.

This article by Maurice Tulloch, was also published in the Telegraph on 19 February 2020.

The most important things in life are not always easy. Take pensions. With the onus now firmly on individuals to work out how best to manage their pension pot, millions in the UK are being set up for a fall.

People are trying to provide for a better tomorrow; they deserve a helping hand.

Deciding what to do with a hard-earned nest egg is one of the toughest financial decisions any of us will take. Yet last year only 6% of adults took financial advice to help them make the right call.[1] People are trying to provide for a better tomorrow; they deserve a helping hand.

Those retiring today might still be benefitting from generous final salary pension schemes, but future generations will not be so fortunate - especially if pension tax relief is diluted in the forthcoming Budget. Big societal changes in the way we work, combined with increasing life expectancy, mean the next decade will see a record number saving in a private pension, a record number reaching their age of retirement, and a record number carrying personal responsibility for their finances.

Auto-enrolment has been part of this shift and on one level pension saving by default has been a huge success. More than 20 million people are now saving for their retirement. But it is only a start. Some groups, like the self-employed and part-time workers, are still missing out. The minimum contribution rate needs to be higher than today’s 8%. Aviva recommends at least 12.5%.

The reason auto-enrolment works also points to the very problem that our society has yet to solve. It depends on inertia. By setting the system as opt-out rather than opt-in, it nudges people to save. But the challenge is that not enough are taking active control of their financial future. 

The challenge is that not enough are taking active control of their financial future.

Most people still do not feel they understand enough to plan on their own.[2] So they too seldom ask the big questions. Am I saving enough? Are my investments getting a good rate of return? And for a world in the grip of the climate crisis, where is my money invested, is it helping to build the world I want to retire into?

The newly introduced pension freedoms have been well received, but they can make this challenge particularly acute. They offer a valuable range of options as people approach retirement from flexible drawdown to lifetime annuities. For the savvy, or those with money to afford the right advice, this is a great development. For everyone else, it’s no surprise they can feel caught in the headlights.

The cost of that advice is one barrier. If the typical pension pot is £50,000 then a fee that might run into thousands is a significant hurdle. But the problem is bigger than cost. Of course, this whole area must be properly regulated, given the potential for harm to consumers. And yet advice is currently designed and regulated to work well for the wealthy. For the mass market, where there is a simpler range of choices and less money to play with, the regulation needs to be more proportionate.

There is no single answer here. Greater confidence might start with a focus on financial literacy for the young. It could include a national mid-life MOT programme, where people are encouraged to give the same sort of consideration to the health of their retirement plans as they do to the roadworthiness of their cars.

We want to work with regulators so that those who need support the most aren’t excluded.

The authorities must play their part, too. We know customers would value help such as stronger guidance, clearer rules of thumb, and interventions when we expect they may be making a mistake. Today’s rules on financial advice and guidance need to be updated. We want to work with regulators so that those who need support the most aren’t excluded.

As a society we should be finding ways to give people confidence to take control of their financial planning. And we must make sure that easily accessible help is there for everyone when they really need it.

[1] Source, FCA, page 10 - https://www.fca.org.uk/publication/research/famr-baseline-report.pdf

[2] Source: https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinanc-es/incomeandwealth/articles/earlyindicatorestimatesfromthewealthandassetssurvey/-attitudestowardssavingforretirementautomaticenrolmentintoworkplacepensionscredit-commitm-entsanddebtburdenjuly2016todecember2017#attitudes-to-saving-and-retirement

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