BLOG: Removing the five barriers to achieving a ‘living pension’

Written by: Lydia Fearn
Something profound is happening in the world of UK pensions.

Never before has the nation’s working generations had such fundamentally different ideas of what retirement means. While, Baby Boomers (ages 54-69) ponder the new flexibility of pension pots heralded by the 2014 budget, generation Y (age 19-33) are beginning a savings journey in a vastly different environment where responsibility has shifted from government and employer to the individual. This is the new era of the ‘living pension’.

Baby Boomers believed in the notion that if they worked diligently over many years, retirement was a deserved break. Generation X (34-53) began to change this idea favouring a gradual slowdown or a more flexible mix of work and leisure. Now, Generation Y is questioning the assumption that retirement must follow work.

While some Baby Boomers have been resentful to defer their retirement income following changes in the state pension age, young people take a different view. Many feel that the traditional post-work retirement is a retirement from life.

According to Barclays, 24% of Generation Y expect to run their own business, or work for themselves in retirement – and 62% want to gradually reduce their work responsibility as they move into retirement. Generation X & Y tend not to think of retirement as a horizon that once reached life changes forever. This is where the “living pension” comes in.

Rather than an arbitrary figure, the living pension is a measure of projected retirement income that factors in ‘must have’ lifestyle elements such as travel, hobbies and entertainment. Barclays found in 2014, that a UK living pension would mean an income of about £17,500 a year on average (18,500 for Generation Y; 17,400 for Generation X; and 17,400 for Baby Boomers).

The problem is that there is a gap between the lifestyle people want as they get older and the lifestyle they are likely to be able to afford, based on their current plans and actions. Successful pension planning means setting objectives and mapping out flightplans to achieve goals.  Unfortunately, a number of barriers get in the way of setting out objectives and sticking to them.

Don’t put off thinking about saving till later in life

Immediate pressures, such as paying or saving for a mortgage and other debts often sidetrack savers from thinking about their retirement goals. However, the problem with this is that the money saved earlier works harder thanks to the phenomenon of compound interest – essentially the interest paid on interest. Make no mistake, it is not easy, but disciplined saving when you are younger pays rich dividends later in life. Even, if it means cutting back on day to day luxuries like a coffee in the morning, or maybe reducing the regular shorter term savings.

Embrace financial education

People find it hard to set a personal income target and this is partly because they do not really understand the long-term savings process. There is a major information gap that needs a collective industry response.  Employers, providers and the government need to improve education on using defined contribution plans and other supplemental incomes to provide for future pension provision.

As Roz Watson points out in the Age of Responsibility report: “It’s all very well offering a market-leading pension scheme, but if the employee doesn’t understand how it works or what they need to do to make the most from it, they’re less likely to join in, sign up and make the most of this opportunity to save for a more secure future.”

Auto enrolment is not a panacea

Whilst auto-enrolment has been very successful getting more people to save for their future, the reality is the default savings levels are not enough to deliver a living pension for many.  In the Age of Responsibility report we consider a 15% level as a rule of thumb to get an individual closer to the target – this would be made up of a combination of employee contributions, employer contributions and tax relief.

We encourage implementing subtle behavioural ‘nudges’ alongside auto-enrolment to get young people saving and empower them to make smarter choices for their future.

Consolidate pension savings

By keeping the pension savings in one place will make it easier for people to understand where they are on the retirement savings journey.  It can be initially a time consuming task, but once it is done it will be easier to manage.

The working world has become more flexible in the last few decades, with employees regularly leaving companies to pursue new opportunities within the same industry.   Ideally we need to create a system that allows pensions to be more portable and flexible to make things far clearer for employees within defined contribution schemes, without them having to do it themselves.

Know the building blocks of your savings

There is so much choice!  – cash ISAs, Stock and Shares ISAs, Help-to-Buy ISAs, SIPPs, defined contributions plans, the state pension. One of the key barriers to creating a successful pension savings plan is understanding the sheer volume of options available and how they can assist you in saving for the short, medium and long term. A pension is likely to be only part of the picture.

Being able to put together the different building blocks of saving into a long-term plan with defined objectives is crucial. Barclays research has showed that Baby Boomers who didn’t appropriately increase their pension contributions are now resigned to downsizing their homes – these savers did not understand the need to carefully consider all future streams of retirement income.

Lydia Fearn is head of defined contribution and financial well-being at Redington

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