In amongst the continuous talk about public deficit reduction, unemployment levels and repossessions, one ongoing area that no political party seems to have all the answers to is how to solve a British pension crisis that appears to be getting worse. Just this week, official figures have shown that only half of employees in the UK are now covered by pension schemes run by their employer.
HMRC statistics also showed that the amount of money paid into personal pensions has fallen by 5 per cent during the recession. All this is despite constant reminders that the state pension is insufficient to live on in retirement (in case you didn’t know, government records show that close to one in five pensioners live in poverty).
The cause of the crisis
So what’s wrong with our pension system? Well, at the risk of oversimplifying, the major problem is caused by demographic shifts (I know that sounds dull, but stay with me). The so-called ‘baby boomers’ are now in retirement or reaching retirement age, which, added to growing life expectancy, means the over-65 population has increased rapidly in the last decade and is estimated to swell to more than a fifth of the overall population by 2025.
Of course, this creates an ever-growing burden on the state, as well as on those companies paying out on ex-employees who are now living longer than ever. With this in mind, more and more responsibility has been put on individuals since the 1980s to maintain their own retirement income. Examples of this include the removal of the link between earnings and the state pension, and the gradual phasing out of final salary schemes in place of the now more commonplace defined contribution schemes.
This is fine, to a point. However, one problem with this is human nature – many people are simply going to underestimate how much they need to save. Throw in a global recession which caused equities and house prices to take a dive, and you’ve got the explosion of a pensions crisis – meaning millions are now approaching retirement with a fraction of the savings they might have been counting on a few years ago, or simply need
The options? Retirees are increasingly having to find ways of topping up their retirement income through methods such as equity release or are simply having to work longer.
The solution
So, it’s clear that the incoming coalition government has a fine mess to sort out when it comes to retirement provision – not helpful when you’ve got a public deficit to shred. Already, indications are that the rise in the state retirement age to 66 will be brought forward, although the government has promised it will not be sooner than 2016 for men and 2020 for women.
At the same time, the new government is expected to go ahead with auto enrolment, a pension reform which will see eligible workers automatically opted in to a workplace pension scheme from October 2012– a move which, it is hoped, will create a much-needed change in public attitudes to early pension provision.
There is, however, much more work to be done to fix this broken pensions model. The coalition government has indicated that it will simplify pension rules to encourage people to invest in personal pensions. This is very welcome, but as many approaching retirement will tell you, the key is stability - too many rule and taxation changes in the last decade have led to a general mistrust of pensions as a savings vehicle.
It may only be the start of the radical reform necessary, but the government’s first priority must be to obliterate public apathy towards retirement saving by introducing simple, workable rules that will last.
Did the recession ruin your retirement plans? Are you worried about your pension savings? If you’ve got any thoughts on the UK pensions crisis, leave us your thoughts below.
