Many years ago a wise and very experienced CEO of a Scottish life and pensions company (sadly no longer with us) passed on to me a very useful piece of advice on pensions which we were discussing at the time.
The gist was that if you put into your pension plan 'Ford Fiesta' level premiums you have no right to expect a 'Rolls Royce' pension.
It’s something that has stuck with me because he was right. If you want a Rolls Royce pension you need to invest Rolls Royce premiums or go somewhere towards it. It's been a big influence on my own pension planning.
Investing in a pension requires some form of sacrifice now for a better tomorrow. There's no escaping that truth.
It is however a parable often forgotten and I was reminded of it this week with the publication of the Scottish Widows' Annual Retirement Report which warns that 12.2m people face the prospect of pension poverty in retirement. For context that’s nearly a third of the UK’s working population of about 34m. It’s also a frightening figure.
It’s perhaps no surprise that this story is among the most read this week on Financial Planning Today and it's one that I'm sure many Financial Planners will attest to.
Of course, the cynics among us, including me, might say that perhaps we’ve read many, many of these stories and they are designed to scare people into saving more in their pensions. This is perhaps a bit unfair as I’m sure Scottish Widows is just trying to highlight a recurring issue and there is no doubt they are right, people are not saving enough. That's not a cynical marketing tactic, it's a worthwhile warning about the future.
There may be many good reasons for pension under-saving: people are so pushed to meet the daily bills they have no more to save into a pension, for example. They may also be on benefits themselves - there are currently nearly 1.7m people out of work. The jobless are unlikely to be giving up their next meal to chip in a bit more to their pension.
So what’s to be done to reduce the number facing pension poverty?
Scottish Widows suggests a number of measures including increasing the statutory level of saving through auto-enrolment from 8% to 12%, bringing the self employed into auto-enrolment and improving compatibility between pensions and other personal financial products (savings, investments, housing equity) to provide better retirement journeys. All good ideas.
I would add to this a few other ideas including making auto-enrolment compulsory, requiring everyone over 16 in work to join a pension scheme and setting up an enhanced State Pension scheme for all those on benefits and unable to pay into a pension so that the state takes over some element of their pension planning. This will be a Ford Fiesta pension, not a Rolls Royce scheme, but it would at least massively cut down on poverty in retirement.
Essentially everyone should be covered by some sort of pension scheme - opting out would not be an option.
This might all sound a bit Draconian but it would go a long way to sort out the current pensions mess where people are literally choosing, or falling into, pension poverty because of their inability or unwillingness to save for their later years. It's like watching a car crash in slow motion.
We should also accept that, for many, working well past State Pension Age may be their only realistic option to maintain their living standards in retirement and the government should support this, as some European countries already are, by lowering taxes on pensioners to reward hard work.
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Kevin O’Donnell is editor of Financial Planning Today and a journalist with 40 years of experience in finance, business and mainstream news. This topical comment on the Financial Planning news appears most weeks, usually on Fridays but occasionally other days. Email:
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