A major new survey carried out by the Financial Conduct Authority has delivered some worrying news – that at least 31% of UK adults have made no private provision for their retirement, believing instead they can rely upon the State Pension to support them in later life. It’s a decision which could pose serious problems for them when the time for retirement eventually arrives, and if you don’t have a pension plan – even if your retirement is only a few years away – we’d seriously recommend correcting that oversight as quickly as possible. We also recommend that you take advice first, as factors like how far away you are from retirement and how much you afford to invest will need to be taken into consideration. Even if you can’t invest heavily, having a private pension plan is now more important than ever.
Times have changed
It goes without saying that, when the Liberal government introduced the first State Pension back in 1908, the world was a very different place. David Lloyd George’s Old Age Pension Act was just one of a number of anti-poverty reforms spearheaded by the then-Chancellor, and it enabled half a million eligible people above the age of 70 to receive a weekly income of 5 shillings per week (7s 6d for married couples.) Forty years later, as Britain was still rebuilding itself after the Second World War, the National Insurance Act introduced a contributory State Pension for everyone, payable from the age of 65 for men and 60 for women. And, with occasional significant variations (including the introduction of the Graduated Pension Scheme in 1959, later replaced by the State-Earnings related Pension Scheme (SERPS) in 19751), the state pension has continued to be something UK citizens have always believed will be there. But even in 1980, when the link between average earnings and the State Pension was removed by Margaret Thatcher’s Conservative government, there were signs that big changes were on the way.
The State Pension is becoming increasingly unstable
In 2013, 50 economists surveyed by the Intergenerational Foundation raised doubts about the affordability of the basic State Pension. Moreover, the Office of National Statistics (ONS) reported that the UK’s total pension liability rose to £7.6tn between 2010 and 2015 with only one-third of that pay-out actually in the bank. This means that the majority of the UK’s pension liability is unfunded, resting on a blind assurance that the government will have enough money to cover its pensions commitments in the future.2 Even the International Monetary Fund (IMF) has weighed in with the warning that, in the decades ahead, traditional State Pensions are unlikely to exist in their current form. Their advice? To pour money into pensions or risk a poor old age.
How about one last thing to think about? The UK’s State Pension provisions have already been labelled amongst ‘the worst in the developed world’ after a 2015 report by the Organisation for Economic Co-operation and Development (OECD) revealed that only people in Mexico and Chile can expect a worse retirement pay-out.
So why aren’t more people investing in private pensions?
According to the Financial Conduct Authority’s survey, there are several reasons. People aged over 50 who are not currently contributing to a pension believed it was too late to set up a pension, while others claimed they were unable to afford it and a smaller number said they would be relying on their partner’s pension instead.
The survey also highlighted that many people find pensions too confusing to understand and have no clear idea what they will need to live on once they retire. Unfortunately, burying their heads in the sand won’t make the problem go away. People are living much longer now. Without a private pension plan, their retirement could become several decades of hardship and poverty at a time when they should be relaxing and enjoying the fruits of their labours.
Start saving into a private pension now
It doesn’t matter how old you are – whether you can see retirement on the horizon or whether you’re a millennial with many years ahead of you to build an extremely healthy pension pot – the sooner you set up your private pension the sooner your money can benefit from compound interest and the growth in the value of investments covered by your pension plan. If you keep delaying your decision, you’ll probably have to make significantly higher contributions to achieve a reasonable standard of living when your retirement comes around.
You don’t have to invest a lot
Obviously the more you’re able to invest the better, but even small contributions can help increase your pension pot and you’ll get tax relief on them as well. Currently, if a basic-rate tax payer contributes £800 into their private pension, the HMRC will add a further £200 to the pot. Coupled with a workplace pension (and if you’re not yet a member of your workplace pension scheme you should be: https://www.gov.uk/workplace-pensions/joining-a-workplace-pension) that could steadily accumulate to help make your retirement years a lot more secure.
Self-employed workers shouldn’t ignore the warning signs either. The beauty of being self-employed means you can be your own boss, which is a great excuse for leaving things you don’t want to think about (like your pension plans) for another day. But, if you don’t start contributing to a private pension now, that ‘another day’ might eventually come too late. Of the almost 5 million people in the UK who are currently self-employed, 45% aged between 35 and 55 have no private pension. If you’re among them, we advise you to get to grips with your pension arrangements as quickly as you can.
In fact, that advice goes for everybody. Whether you’re an employee or self-employed, a part-time worker or a business owner, it is time to stop relying on the expectation of a State Pension and start saving for your private pension right away. At Moyes Investments, our friendly team will tell you everything you need to know about saving towards a healthy retirement. We will help you to make an informed decision about your future and work with you to make your future goals and financial security a reality. Contact us today on 01638 429975 or [email protected]. We’re looking forward to advising you.