A Bristol pension expert has warned if the current system in the UK doesn’t see significant changes in the near future, the country could face a ‘huge social welfare problem’.
The announcement by Stuart Price, partner and actuary at pensions specialist Quantum Advisory, comes following the latest report from the Organisation for Economic Co-operation and Development (OECD).
The report showed that if relying solely on the state pension, British retirees face the steepest income drop when they stop working compared to any other OECD country.
The report found that when Brits gave up work their income would roughly fall to just 29% of their usual earnings compared to the cross-country average of 63%.
Stuart shares his thoughts on the report.
The results of the OECD report aren’t surprising at all. This is a problem that has been incubating for some time and should now be at the forefront of the Government’s agenda.
The intergenerational gap is widening when it comes to pensions.
The issue is, people in retirement or close to retirement were generally afforded generous defined benefit schemes from their employer, which has meant they are able to live comfortably in retirement.
The generation in work now, do not have this luxury and invest in defined contribution schemes, which often receive limited contributions from the employer who is still paying for the defined benefits pensions of the older generation.
There’s no denying that the automatic enrolment scheme introduced by the Government in 2012 has been a success with a record number of people in the UK now saving for retirement – but there is still more that can be done to widen the net.
The right balance is needed between what employees pay, employers pay and what contribution, in tax relief, is made by the government as all three sources are currently being stretched.
If individuals can’t afford the minimum contribution, there should be an option to ‘opt down’ rather than opt out completely. The scheme also needs to include the self-employed and those on a lower income.
I always say it, but education is key to getting individuals and employers to understand the importance of saving for a pension.
My rule of thumb to give people the best chance of a decent income in retirement, is to half your age and that percentage of your salary should be paid in total into a defined contribution arrangement.
So, for a 30 year old, the total contribution from the worker, employer and government should total 15%. With the current average combined contribution standing at around 4%, the problem is clear.
The revolutionary Pensions Dashboard, due to be introduced in 2019, which will allow everyone to see all their pensions, including the State Pension, in one place and know exactly what their income will be post-retirement, is a solid start, but more needs to be done by all stakeholders involved otherwise we are going to have a huge social welfare problem in the future and the big question is ‘who will foot the bill?’