There are positive signs we will prepare people better for retirement in the future
Last week, a relative of ours asked me to give “financial advice” to her daughter who has come into a sizeable – if not life changing – five-figure sum via an inheritance.
After all the caveats about not being an adviser, along with recommendations as to how she could go about finding one, I suggested that setting up some sort of private pension provision for her newborn baby might be one idea worth discussing with whoever she chose to advise her.
We all know the benefits of compound interest: a single contribution of £3,600 (£2,880 after tax relief) into a pension pot could grow to almost £40,000 by the time they reach the age of 60, assuming compound annual growth of 4 per cent per year after charges.
Double up on that strategy over two recurring tax years and your child will have a sizeable lump sum so they can access a decent income from long after you have shuffled off this mortal coil.
I was thinking about this informal suggestion last week after reading the FCA’s most recent data bulletin, reporting on the evolution of the pensions market.
Alongside other market data, the issue looks at information from the regulator’s October 2017 Financial Lives Survey.
The report makes for grim reading. Almost a third (31 per cent) of all UK adults have no private pension provision to tide them over in old age, four out of five have not given thought to how much they should be sticking into their pensions and three quarters have not even considered how they will manage when they retire.
This level of ignorance continues among those who are paying into defined contribution schemes: 71 per cent have no idea of the level of charges they are paying on their pensions. Strikingly, almost a third of those saving into a DC scheme do not know how much their pension is actually worth.
Perhaps more significant is the gender imbalance that emerges from the FCA’s survey: almost six in 10 (59 per cent) of those without private pension provision are women. Just over half of retired women say that the state pension is their main source of retirement income, compared to a third of retired men.
It is dangerous, of course, to read different sets of figures alongside each other, but I could not help comparing this data bulletin with findings from the separate non-advised pension sales review, also published recently by the FCA.
This too found a worrying level of ignorance among people approaching the point where they can access their savings pots as a result of the pension freedoms introduced in 2015.
The survey found that, before the freedoms, only 5 per cent of the comparatively small number of drawdown sales were made without a customer receiving advice. Today, with drawdown sales now twice that of annuity sales, 37 per cent are made without advice.
Perhaps unsurprisingly, those who were instrumental in promoting unfettered access to pension savers’ tax-free cash by reference to buying Lamborghinis with it are now eager to stress how keen they are to ensure those savers receive the information they need to make the right decision.
For example, a press release from former pensions minister Steve Webb, now director of policy at Royal London, said in response to the FCA figures: “Royal London has recently developed information packs to be sent to people five years before retirement to help to address this issue and we hope that other providers will follow suit.”
Yet the regulator itself points out the evidence is that “customers do not always read this information when they access their pension savings”.
Is there any glimmer of light ahead? To paraphrase the great British writer of the 1930s and 40s George Orwell: if there is hope, it lies with young people.
The FCA suggests that there are some signs auto-enrolment is increasing pension take-up rates among lower age groups. Its survey found that three out of 10 18-to-24-year-olds now have a pension.
A quarter of this age are now saving into a DC scheme. Almost half of 25 to 34-year-olds hold a DC pension scheme.
To be sure, the sums involved are not great.
Three in five of those in the 18 to 24 age bracket who are saving into a DC scheme say they have less than £5,000 in their pot. Half of those aged 25 to 34 say their pension pot is worth under £10,000.
But, as the FCA points out, this reflects the relative immaturity of the UK auto-enrolment market. Compound interest, as we know, will boost those sums. Also, from the start of this month, joint employer and staff minimum contribution levels into workplace pensions rose from 2 per cent to 5 per cent, increasing further to 8 per cent next April.
This will, of course, impact take-home pay and will not be popular with all employees. But at least it gives the opportunity for savings to build up over the next 30-40 years, preventing the level of unpreparedness for retirement we see today.
It may not be much to hold on to but, in an otherwise grim set of findings from the FCA, it is probably the best we can hope for.
Nic Cicutti can be contacted at firstname.lastname@example.org