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State of ignorance

Pension reform will have little impact unless the public is educated in retirement fundamentals

Judging by the response to the publication of the Turner report, it is difficult to see a consensus emerging on how best to deal with pensions over the next 20 to 30 years.

One aspect of the debate relates to average retirement ages and how they should form part of long-term pension reform. This issue is complex, as we have seen in the attempts to change the pension age of public-sector workers. Significant inequalities in life expectancy and health across society will restrict the scope for blanket increases in the state pension age in the short term.

In a strangely timed decision, the Liberal Dem- ocrats unveiled their pension blueprint in advance of the Turner report. Their plans include major changes to state pensions and raising the state pension age to 67, although this would only happen in 25 years.

There is considerable ignorance among the public on pensions generally but lack of knowledge on the effects of different retirement ages is marked.

The Office of National Statistics has just published the first edition of Pension Trends, which brings together key statistics from Government departments and other organisations to illustrate the social and economic trends that shape changes in UK pensions. People’s expectations of when they might retire may not match their actual date of retirement but these expectations may affect the decisions they make on saving for their retirement.

Pension practitioners will know that people often delay pension planning until later in life. The number of people who say they are saving rises when they reach their mid-40s. Pension Trends indicates a number of reasons for this delay, including:

  • An unwillingness to deal with complex matters surrounding pensions.
  • A reluctance to deal with the uncomfortable notions of retirement and old age.
  • A perception that retirement is in the future, so planning for it is less pressing than other immediate commitments.
  • A lack of clarity about what the future may bring and about retirement and retirement income.

Pension Trends found that in 2002, 34 per cent of people in work or intending to be in work in the near future expected to retire at 60, 24 per cent expected to retire before 60 and 34 per cent after 60. The pattern is slightly different between men and women but overall 52 per cent of men and 69 per cent of women of working age expected to retire before 65.

Self-employed people were more likely to expect to continue working into their 60s and people with experience of self-employment were more likely than employees to expect to work after state pension age.

In 2002, 15 per cent of working-age people were unable to estimate how long they would be in retirement but more than half expected this to be at least 20 years. Only 7 per cent thought they would be in retirement for less than 10 years. The longer an individual’s retirement, the longer the period over which their income and wealth must be spread.

It is evident from reading Pension Trends that people will have to improve their basic understanding of pension fundamentals – both state and private – before they will change their behaviour and take responsibility for shouldering part of the pension burden.

Knowledge of state pensions is woeful because of the complexities of the basic state pension, Serps, the state second pension, the system of credits and the record of contributions needed to qualify for them. Education is also needed on the costs of providing an income in retirement that will last for a longer period as a result of improved life expectancy.

The Turner report has been greeted with plaudits and brickbats but its proposals, whether implemented or not, will make little difference to the behaviour of individuals until we put in place a system to educate people on these fundamentals.

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