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Building confidence in retirement saving

If the pensions industry has started 2018 as it means to go on, recent research on retirement incomes from Prudential suggests things have got off on the right foot.

The annual ‘Class of…’ research found that among 1,000 people planning to retire this year, the average expected retirement income is £19,900 a year. This is the highest level since the survey began in 2008 and the fifth consecutive year it has increased.

However, can this positive news be taken at face value, especially as almost half of those surveyed felt they were not financially prepared for retirement?

Onward and upward

Without understanding why average retirement incomes are increasing, it is difficult to assess whether the upward trend is likely to continue

Prudential head of business development Vince Smith-Hughes attributes the rise highlighted in the research largely to strong investment performance in recent years.

“The FTSE and one or two other markets have been at record levels, so whatever people have invested in it is going to have done well,” he says.

That said, with fewer people retiring with defined benefit schemes and less people likely to buy annuities post-pension freedoms, he expects to see more volatility in retirement incomes going forward, as they will increasingly rely on stockmarket investments to produce an income.

Other commentators point out that retirement incomes are influenced by various factors and will vary according to individual circumstance, so they are cautious about relying on Prudential’s figures to make assumptions about the future.

Technical Connection head of pensions strategy Claire Trott says: “Some of the changes to the options in retirement and the fact more people are accessing their funds through flexi-access drawdown or uncrystallised funds pension lump sum could partly be the reason that incomes for those retiring are increasing.

“These types of income aren’t restricted in the same way as we are used to, such as in capped drawdown or in an annuity. Although the starting value may be higher, it may mean they don’t last a lifetime, as pension income should do.”

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The Prudential research does not look at the different sources of retirement income among those surveyed. However, Intelligent Pensions technical director Fiona Tait says some people retiring this year will have DB pension income on top of their state pension.

“This is expected to decline over the next decade as DB schemes continue to close to new entrants,” she says.

“Modelling from the Pensions Policy Institute suggests retirement incomes will follow this decline in the short term before DC schemes are able to build the funds to provide an equivalent level of retirement income.”

Saving enough

Pensions freedom and the move towards DC schemes has meant individuals now have greater responsibility for the financial aspects of their retirement. In contrast, previous generations may have found it all taken care of through a combination of the state pension, final salary scheme and an annuity.

A recent report from the Government Actuary’s Department highlighted that if we continue funding the state pension as we do now, the National Insurance fund is likely to run out by 2032. This makes it increasingly important that people pay as much as they can into a pension as early as they can – even if money is tight.

What new longevity measures mean for retirement advice

Most agree that having a degree of compulsion is the only way to ensure people save enough for retirement.

Liberty Sipp director John Fox thinks the UK should have similar to the 401K in the US. He would like to see the introduction of a portable scheme where people get used to contributing 12 per cent of their salary. However, he thinks it is important to allow them to take loans from it, so it is relevant throughout their lives, rather than being inaccessible until a certain age.

Others see auto-enrolment as the answer. However, it is still early days and contribution levels – due to rise over the next couple of years – are not yet where they need to be.

What is clear is that retirement saving needs to be couched in terms that people understand.

Selectapension national accounts director Peter Bradshaw says: “We need to put their lifestyle in the future into today’s terms. If someone has gym membership and a Sky package, we need to ask them whether they would give these things up when they retire? If not, they will need to put something aside now for the sort of lifestyle they want in the future.”

EY insurance associate partner Jason Whyte says: “Saving in a pension means giving up money now for the promise of money later. For that promise to be worth the sacrifice, savers have to be confident the promise will be delivered and that it will be worthwhile. Complexity, stories of pension scheme failures, ongoing changes by successive governments and poor performance all undermine that trust.”

Building confidence

So improving communication would also boost people’s confidence in retirement saving.

David Bird, head of proposition development for Lifesight at Towers Watson, says: “One of the things that bothers me about the way the industry talks to people is that they calculate the ideal retirement income and tell people they need to be saving a certain percentage of their pay. If what that someone takes from it is that because they are not doing it, they may as well not bother – that is counterproductive.

“Positive feedback is more important that telling people they’re not doing enough. We need to encourage people to save as much as they can and it’s the industry’s job to make the most of it.”

Nest director of customer engagement Mark Rowlands has similar views and thinks the industry can learn a lot from advertising in the consumer market.

“We need to think differently about how we communicate, using personalisation, timing and technology – almost a one-to-one conversation with people to help build confidence. The way Amazon and Facebook talk to consumers is more positive and personalised.”

That said, he warns too much information can freeze people into doing nothing.

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Fidelity International head of pensions product Carolyn Jones says tools, such as the forthcoming pensions dashboard, need to be put in a place where people are not expecting it, so they are not only finding it through active engagement with their pensions.

“The power of the pensions dashboard will be if you see it whenever you log onto your bank. Then people will see it once a week, for example. But if you say to someone ‘you can find a pension dashboard there’, people have to be interested in pensions to go and look at it.”

Taking advice

Research conducted last year by Close Brothers Asset Management found that people have got the savings message, but are not always saving in the right way.

As an example, the firm’s head of financial education services Jeanette Makings says some people are saving for retirement in cash.

“Cash is not the best place for retirement savings so there’s a disconnect in understanding of where they are saving. There are so many savings choices and providers, and people are information rich, but their filtering skills are poor as they don’t know what bits are relevant to their decision.

“Our recommendation for people coming up to retirement is that they seek appropriate advice as it’s not something that can be taken lightly. In some cases, the decision can’t be undone if people get it wrong.”

Smith-ThompsonAdviser view

Jamie Smith-Thompson, managing director, Portafina

“With markets being fairly strong over the past 10 years, many people should have seen their investments grow and their income too. But there will be an increasingly larger gap between those who have sought advice and invested wisely, and those who haven’t and remain in funds that do not perform well.

“It’s important we educate people to increase their trust and confidence in pensions. Auto-enrolment has seen people already start to think differently. Those who wouldn’t have usually given their pension a second thought, now take it seriously and start saving a lot earlier.

“The sooner people can start to save and the more they can save, the better. What may feel like a small contribution now could make a big difference further down the line.”

Adviser view

Martin Harris, head of advice, Wealth Wizards

“So many people aren’t planning for their futures or don’t know what their retirement income even looks like. This has the potential to be a huge societal issue. Unless we address it soon, we will be seeing a bleak future for many Brits.

“Some of the inertia around pensions is around a lack of confidence in the area and a belief that it can be sorted later. The idea of advice can be intimidating and perceived as costly too – people often end up de-prioritising their planning. This is where digital advice can play a key role. It can build confidence for people and also help plan in a low cost and accessible way.”

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