It is no secret that many people, particularly younger people, are not saving enough for their retirement. A recent study by Scottish Widows suggested that on average people need to save 12 per cent of their income to be able to provide themselves with an adequate income in retirement. However, the study found the average savings ratio is only 9 per cent and this is skewed upwards by those in their fifties and sixties.
Overall, the study suggests that only 48 per cent of the population are saving enough to provide for an adequate retirement and 21 per cent were saving nothing, up from 19 per cent last year.
The two groups most likely to be under-saving or not saving at all are women over 50 and people under 30.
Scottish Widows says: “For half the population, the message to save more is not being heeded.”
But is there anything that can be done to encourage more retirement saving, particularly among the under-30s? It is widely accepted that the earlier you start saving for retirement, the easier you can build up a decent retirement fund. But with other priorities, such as paying down debt and saving to buy a house, many younger workers say they don’t have any extra funds.
According to the Office of National Statistics, the median average wage in the UK is up to £21,320. If this means a pre-tax income of £1,776 a month, 12 per cent of this put aside for long-term saving would amount to £213.
The biggest reason given in the Widows report for not saving is a lack of affordability by 68 per cent.
Independent pension expert Dr Ros Altmann agrees that savings rates need to go up and says there is widespread misunderstanding about how people will pay for their retirement.
Altmann says: “We are so far behind the curve, it is very difficult for younger people to prepare for retirement. We have been living in an unreal world, where we pretended that you could work less, save less, live longer and still get a decent pension. We are living longer but what is the point if it is in penury?”
Hargreaves Lansdown head of pension research Tom McPhail says affordability is a real problem for younger workers. He says: “In the short-term, younger people simply cannot save enough for pensions.”
So, if people are unwilling or unable to save, what is the solution?
Altmann says: “Part of the problem comes from this confusion about this thing called pensions. Pensions are just a form of lifetime savings and maybe at the end of the day we reconsider the whole picture of savings.”
McPhail says the key is to look at a variety of different financial products through your work life so as to climb up the savings ladder in a way where people are aided by employers and the Government to save a little at a time.
He says: “It is about using flexibility. It does not make sense for someone in their twenties to have a blinkered view, where they think they must invest 12 per cent each month. The ideas around the workplace savings account with a Sipp, pension and an Isa working together is interesting, where younger people could start with the mandatory 4 per cent, matched by their employer. That’s where you start. You could then channel an extra £25 or £50 or so into an Isa and then investing in a mortgage somewhere down the line. This builds and builds and then by the time you are in your forties and are at your peak earnings potential, you can really begin to run at full pace.”
The results of the study show some sympathy for this approach. It found that 16 per cent of people would save more if there was greater flexibility in pension products and 15 per cent said they would save more if they could move monies between pensions and savings products more easily.
Altmann says: “Flexibility in a pension product, especially for someone at a younger age, is very important. We have people in their 40s now who have £50,000 in a pension and are having their houses repossessed. That can’t make sense. But it requires some revolutionary thinking.”
But Aegon head of industry development Dr Peter Willi-ams says the solution has to go beyond just flexible financial products working together.
He says younger people have a “mountain to climb” in being able to save for a pension alongside all the other financial demands of life, such as homeownership. He thinks the only way young people will be able to reach the sufficient pension target is by changing the whole culture of finance in the UK.
He says: “I think it is cultural. If the parents are in debt, it does not encourage saving. The answer is to start now slowly and build up. It’s behavioural science – you have to get in to the habit of doing it or you will forever put it off. Youngsters have university fees, housing, marriage and everything else to pay for so the idea of putting it off until you are 40 is impossible because by then you will have a cliff to navigate rather than a small hill.”
Williams says this cultural change will have to go as far as reassessing homeownership, from that of an asset that will be passed on to one that will have to be used to fund retire-ment and long-term healthcare.
He says: “This is going to take years to change, that’s why all we can do is move people into the right direction. We need to go back to the culture of our parents in the fifties and the sixties who used to have jars of savings and who used to budget for things they wanted.”