Last week’s call by Treasury select committee chair Andrew Tyrie for a major Government-commissioned review into the long-term savings market is welcomed by the wealth management industry.
Recent reports on the UK’s savings gap, or timebomb if you prefer, reveal some startling facts about the need for us all to prepare for our financial futures.
A report last month from the think tank Policy Exchange suggests 11 million of us are at risk of entering ‘pensioner poverty’ when we retire.
This means anyone earning the average wage of £27,000 will need to set aside more than six and a half times as much again to generate the Government’s recommended retirement income of £16,200. The average pension pot is estimated to be just £36,800, which on current annuity rates is enough to generate a retirement income of between £1,300 and £1,500; the average earner would need a pot of around £240,000, assuming they receive the full single tier pension. The think tank concludes if you were not saving a great deal before, it is time you started thinking about putting a bit more away each month.
HSBC’s annual ‘Future of Retirement’ report found that two-fifths of retired people in the UK admit they had not prepared adequately for retirement, while a recent report from Aviva found almost a third of British families have less than £500 in savings.
When taken together with the Office for National Statistics’ data showing a fall in the household saving ratio, you can see this is something we and Government cannot ignore.
We can understand why people do not save enough, particularly when they are young. Usually it comes down to other priorities and commitments, which begs the question of whether Government should intervene? There is also the assumed psychological point that today’s young people have grown up in a climate of “buy today”, often based on credit facilities. Such an attitude flies in the face of saving for the future.
Policy Exchange suggests saving for our pension must become compulsory. There is an argument this needs to happen, given the facts, but perhaps it demonstrates the point that our society needs to have a very serious rethink on the subject of savings.
Savers need certainty and straightforward products. Last year’s rumours that the Treasury was considering a £100,000 cap on the total amount people could hold in their Isas only exacerbated the uncertainty for individuals. People know they need to save, but they need to be encouraged. Isas remain as popular as ever because they are so simple to understand. The Government might be well advised to look how this can be enhanced and indeed replicated for pensions.
A review into the long-term savings market would be just that. We cannot afford as a society to have our adult population believing that preparing for their retirement means starting to put money away as late as 40. They need a system they know works to their benefit and encourages them to save as early as possible.
As we approach the Budget, the WMA believes the Chancellor’s priorities should include not only those growth measures essential to sustaining our economic recovery, but also long-term policies to help individuals and families to prepare for their own financial futures – and, if necessary, to incentivise them to save. We have to find ways to change mindsets so more of our futures are catered for appropriately.
If this doesn’t happen, then perhaps Mr Tyrie’s calls will grow louder.
Tim May is chief executive of the Wealth Management Association