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LONDON – UK workers face a “risky” future when it comes to their pensions, according to a report published by the think tank Institute for Fiscal Studies.
The report published last week outlines the “challenges” facing future generations and argues that the whole system needs to be rethought.
According to the IFS report, almost 90% of Britons do not put an appropriate amount into their pension fund – generally considered around 15% of income. Low-income earners are particularly at risk as they do not necessarily meet the requirements to apply for an automatic pension.
“Only 44% of those earning £5,000–£10,000 ($6,200–$12,500) a year entered into a pension in 2019,” the report said, compared with 87% of middle-income earners (from £10). 25,000 to £30,000) and 92% of those earning more than £50,000.
Most pensions are saved through defined contribution schemes, where the final amount depends on how much the owner has contributed over their lifetime and the success of the investments. their private. The alternative is the less common defined benefit system, in which retirees receive retirement income based on their final salary and the number of years they worked for their employer. .
We need to rethink the pension offering now for a chance to avoid a future that looks worse than the present.
Institute for Financial Studies
More and more people are retiring with a defined contribution pension, the report says, which offers more flexibility but also gives owners responsibility for managing the finances and associated risks.
“While pension freedoms give people the opportunity to take control of their own finances, even for most decisions about how their retirement assets are used,” the IFS said. Retirement is very difficult.”
The report said more and more people were choosing to work for themselves, but there had been a “drop” in pension savings among the self-employed.
“We need to rethink the provision of pensions now to have a chance of avoiding a future that looks worse than the present,” the IFS report said.
High contribution rate
According to Romi Savova, CEO of pension management platform PensionBee, increasing the rate of pension contributions for UK workers should be a “top priority” when reforming the pension system.
“Auto-enrollment has proven to be an invaluable tool in increasing the number of people participating in pension savings and by abolishing the lower income threshold (currently £10,000), its benefits ultimately could ultimately attract more low-paid and part-time employees,” Savova told CNBC by email.
Including self-employed savers in that framework will also boost their pension fund and reduce their dependence on the state pension later on, Savova added.
Most people in the UK are automatically entitled to their state pension, currently £203.85 ($253) a week. The amount is more generous than previous state pensions, according to the IFS, but would still lead to a “major drop” in living standards for middle and high earners who haven’t dropped the money. into private pension funds during their lifetime.
The state pension age is now 66, which on average means a man’s pension has to cover another 19 years of his life, while a woman needs to save enough money to cover for another 21 years after she quits, according to life expectancy data from the Office for National Statistics.
The state pension age is set to rise to 68 between 2044 and 2046, which, according to the ONS, without reform will only create a tougher retirement environment, according to Nigel Peaple, chief executive officer Pensions and Lifetime Savings Policy and Policy Combination.
“Increasing the State Pension Age will only increase poverty among pensioners, which is disproportionate to those with lower incomes and early retirement due to health,” Peaple told CNBC via email. poor health.
A ‘big problem’ to solve
Even if people are depositing enough money into their pension, there is much debate about how that money should be used and whether it is properly invested to maximize returns.
For example, the recent change in bond market According to Nicholas Lyons, the mayor of London, this is “a big problem” that needs to be addressed.
“Asset managers have been able to invest in fixed income instruments because we have been in a bull bond market for the past 20 years,” Mr. Lyons told CNBC.
“We need to invest in the real economy, so this is a moment where we shouldn’t look at what’s happened in the last 15 years and say it’s going to go on forever. We need to see this. is the starting point,” he said. more.
