It is a well known fact that people in the UK are not saving enough for their retirement. Lord Turner’s proposals address the critical issues required to put the nation back on track to a healthy pension future. A combination of longer working lives, higher taxes and much bigger levels of savings are not unreasonable suggestions to ensure the country is prepared for the demographic change we face in the not too distant future.
Of the 11 million retired people; 2 million are in financial difficulty, 1.6 million have returned to work and 3.8 million have had to cut back on their spending. The number of people over 65 years in age is expected to nearly double over the next 30 years while the number of people of working age is expected to be only slightly more than we have today. It is also expected that people will live longer.
Fidelity supports Turner in his proposals for a National Pension Saving Scheme (NPSS) – which not only embrace the benefits of good quality corporate schemes, but also extend them to those not currently covered – and estimates that for someone on the average UK salary of £24,500 per annum, this will represent a total annual pension contribution of £1,960.
Research we have recently conducted has shown that these proposals could be highly beneficial for as many as 12 million workers across Britain who are currently not saving in any work-related pension plan. For this reason, we are also a strong supporter of auto-enrolment – where employees automatically join a scheme with the right to opt out – as a means of increasing uptake of work-based pensions. We believe it could play a crucial role, alongside State pension reforms, in helping increase overall retirement savings levels in the UK.
While there has been some criticism that companies may well “downgrade” their schemes as NPSS is a cheaper option, we don’t believe that this is necessarily the case. Many of those in the pensions industry expressing concerns are seeking to protect the status quo. Existing pensions have many flaws and investors often do not understand where their money goes. Pensions are also inflexible and many have performed badly. Lord Turner’s proposals point toward transparent, simple and fair value pensions.
The proposals also mark the move to mutual fund based pensions which are more transparent, flexible and also provide much wider choice than traditional structures.
When planning for retirement, there are four vital areas to consider:
1. How early should you start saving?
2. How much do you need to save?
3. How long do you need your pot of money to last?
4. What is the right mix of assets?
While individuals can often attempt to answer the first three themselves, evidence from the US underlines the value of independent advice on retirement planning. The savings rates of American families who use the services of an adviser are twice those of families who do not – 6 per cent versus 3 per cent of income, according to recent research by FMR Co. Households assisted by an adviser also save far more each month – $398 against $167.
In any case, expert advice is vital in answering the fourth question. Experience from the US pension fund market shows that the biggest variable in investment returns is the mix of assets in which the pension contributions are invested over the lifetime of the investment. This is fundamental when determining the default fund options.
Fidelity has run similar funds to the lifestyle funds suggested by Lord Turner with much success and we believe these are the right solution for anyone saving for their retirement. These WealthBuilder target funds manage investments to a set target date and combine the potential for strong investment returns together with management of risk as the target date approaches. This date need not necessarily be retirement age. Indeed, with life expectancy increasing year by year, it is more important to look beyond retirement and to assess how long you will need your assets.
Managed by Richard Skelt, the asset allocation of the Fidelity Target Funds is constantly monitored; the money is shifted into less risky investments such as bonds and cash as the target date nears. A monthly investment of as little as £50 in the WealthBuilder Target Funds could provide a pot of more than £120,000 over 40 years. This figure assumes an annual investment return of 7 per cent, an initial charge of 3.5 per cent and an total expense ratio (TER) of 2 per cent each year.