Advisers are well aware of the huge void between the public’s expectation of what their retirement will be like and the stark reality. Many people expect a retirement that could extend well into three decades but the amounts they are saving point to retiring considerably older than they expect or a hand-to-mouth existence when they stop earning.
Pension professionals say the retirement saving structure has not adapted to changing demographics. In 1950, a 65-year-old male could expect to live a further 12 years. By 2008, that figure had risen to more than 21 years and by 2050 is expected to reach 25 years. These figures are averages, meaning around half of people will live longer, some considerably more so.
Factors such as low gilt yields and increased longevity may be beyond the control of Government, regulators and providers. Yet, while the need for retirement saving has increased, take-up of pensions has fallen.
Pension experts say radical changes are needed, beyond the pension reforms already in the pipeline, both to the way that pensions are drawn and in how consumers understand what retirement planning means for them. They also say the pro- cess of distributing products to indiv- iduals must be made more straightforward if private sector solutions are to succeed at all income levels.
One area where there is broad consensus for change across the pension industry is on the abolition of the requirement to go into alternatively secured pension at age 75. Most pension experts agree this should be coupled with a facility to allow any funds remaining in schemes on death to be pass- ed down to dependants within a pension wrapper. With the state pension age rising to 68, experts argue that a raising or removal of the requirement to go into alternatively secured pension just seven years later at age 75 is long overdue.
Hargreaves Lansdown head of pensions policy Tom McPhail says: “I am comfortable with abolishing compulsory annuitisation altogether. If you have only got £25,000, you are probably only going to buy an ann- uity anyway. For anyone else, they can manage their assets more effectively if the age 75 rule goes. I would like to see surplus funds on death cascade down to children within a pension. This would make pensions considerably more attractive to the public.”
Richard Jacobs Pension & Trustee Serv- ices director Richard Jacobs believes this would not cost the Government anything in terms of income and could, in fact, boost Treasury revenues. He says: “At the moment, people will buy an annuity to avoid the 82 per cent tax. The Government would get a smaller bite of a bigger cherry if they allowed people to remain in unsecured pension after 75 and then get 35 per cent on death.”
Axa head of pension development Mike Morrison says: “Mortality drag means buying an annuity becomes increasingly attractive as people get into their 70s. But giving us the freedom to design products with a clear run from age 55 to death would make it easier for providers to address the problems that retirees are facing.”
Even when the planned reforms to the pension system are implemented, more radical changes will be required if advisers are to be allowed to give people any chance of meeting their retirement objectives.
Standard Life senior pensions policy manager Andy Tully considers that real retirement ages will increase to between 74 and 86 for median-earners. He says it will be decades before auto-enrolment has done anything to redress the fall in pension incomes that will result from the flattening of state second pension. Someone earn- ing £43,000 and reaching state pension age in 2030 will be £3,000 a year worse off than those retiring today, points out Tully, requiring a £78,000 pension pot to make up that shortfall.
Tully believes that product providers and regulators need to do more to make it easier for people to save. He says: “People have talked for some time about initiatives that encourage staff to pay more in, such as Save More Tomorrow, but it has not really taken off yet. More work in this area would help. No one is talking about getting rid of regulations altogether but the rules surrounding financial promotions could be simplified to make it easier to ask pension savers if they want to increase their contributions.”
Tully believes annuities are not necessarily the best product for people who are looking to work through their retirement. He says: “The at-retirement phase needs to be made simpler and more flexible. Ann- uities do not really fit with flexible retirement because they are a once and for all dec- ision. There has to be some way of getting a mid-market product that gives some growth with an income floor but it has to be at a price that people are willing to pay, and it is fair to say that now is not the best point in the economic cycle to introduce something like that.”
Jacobs is sceptical of the role of downsizing and equity release to solve the pension crisis and says people need to be encouraged to change their mindset if they are to make their money work over several decades of retirement.
He says: “Most people have no idea how long they are going to live and they generally underestimate it but they certainly do not invest in the way that their time horizon should suggest they do. People need to accept their assets are going to be around for a long time and if they put their money on deposit they are going to lose the bet.”
This is not an easy argument to get across to people. Jacobs says the role of advice is crucial to increasing understanding of pension saving rates but he is concerned that the effects of the retail distribution review will only make that harder.
“More education in relation to risk is vital if people are to make their retirement pots work for them over several decades. The problem is that face-to-face advice is the only way to achieve this level of understanding and you can only deliver this to the people that really need it through a commission-based model,” he says.