Retirement Funds TOO Small
For the purposes of this report, Key Note defines a pension extender as a way people devise to make their pension go further, including equity-release plans and Individual Savings Accounts (ISAs). The typical Briton now has a retirement fund of only £30,000. The Government's minimum income guarantee will be sorely needed by millions of pensioners, to improve their quality of life in retirement beyond the subsistence level of the basic state pension.
In fact, from 2003, the combination of state pension, minimum income guarantee, and pension credits for savings will mean that single pensioners will have at least £100 a week, and couples at least £154. In most cases, this is enough to cover basic living expenses. The knowledge that there is a safety net may lead adults with small and moderate incomes - there are nearly
13.4 million taxpayers with annual incomes under £15,000 - not to bother about extra pension saving at all, and to use pension extenders to augment state provision.
This possibility leads a growing number of voices to call for pension contributions to be made compulsory. They include around 60% of MPs, Virgin Money and, in his personal capacity, Sir Howard Davies, Chairman of the Financial Services Authority (FSA).
Dismal Conditions FOR Pension Sales
The fall in the stock market, bad publicity for pension mis-selling, and the public's confidence that the Government will retain an income safety net, combine with opposition to compulsory annuities to form dismal conditions for companies trying to sell pensions. These factors will create a major new market in coming years for financial products to help retirees make the most of their limited pension savings. Women, who are chronically
under-pensioned compared with men, form a strong market for pension extenders. The severe reduction in final-salary occupational pensions will also augment demand for pension extenders.
NOT AS Well OFF AS WE Like To Think
The statistics often quoted by the Government on average earnings are not an accurate reflection of reality. Only 27.6 million out of the 60.2 million people of all ages resident in the UK have an income large enough to pay income tax. For those who are taxpayers, almost two-thirds have before-tax incomes under £20,000, and only 4.6% of taxpayers earn £50,000 or more before tax.
These statistics show that only a minority of the population have incomes large enough from which to save adequate amounts to sustain them in a long retirement. Women are very poorly placed to save substantial amounts for pensions: fewer than 600,000 in the whole of the UK have earnings of £35,000 a year or more.
False Expectations A Barrier To Saving
Key Note commissioned NOP to conduct a survey into pension provision and attitudes towards retirement. The survey was carried out among 936 people aged 45 and over across Great Britain during April 2002. Interviewers asked 12 questions, devised by Key Note, about work and retirement income. The research suggests that people are rather vague about their retirement incomes, but are not too concerned, either. Other surveys carried out on behalf of Key Note have also recorded that people are unsure how much they need to save to build up a pension fund sufficient for their future needs. The survey for this report hints that false expectations of retirement income may be widely held, and if so form a barrier to greater saving in preparation for old age.
The survey also indicates that the equity-release market could more than treble, and that there is virtually no support for putting the qualifying age for the state pension up to 70.
Equity Release Needs Strong Property Market
People aged 65 and over in the UK own property worth around £460bn, but in 2001, they withdrew less than 0.2% of this in equity release. Companies that already have a substantial presence in the market include NPI, GE Life, Northern Rock, Norwich Union and Scottish Widows. There is a large potential market for equity-release products to supplement retirement incomes, provided that pensioners' children are not hostile to the concept, charges are transparent and fair, and there is a guarantee against negative equity. However, a lively equity-release market depends on an appreciating property market, and there are many signs that property price inflation will soon moderate.
Basic Steps To Extend Pensions
Methods of extending pensions include the following:
individuals saving up to the annual maximum in tax-exempt ISAs
unions pressing employers to contribute more to pensions for their workers
the retired using their voting power at the ballot box to press the Government to raise the basic state pension (as well as the minimum income guarantee) in line with earnings rather than prices
retirees shopping around for the best annuity rates
retirees making use of impaired-life annuities where appropriate
pensioners taking a part-time job
everyone economising on expenditure - people of working age so they can save more, and the retired so that they can eke their pension out.
The Chancellor is relying on taxation and National Insurance revenues rising from £391bn in 2001/2002 to £520bn in 2006/2007. The main reason for these inflows not to materialise would be a slowing economy. Going to the financial markets to borrow large sums of money would push interest rates up, another way of applying brakes to the economy. Budgets during the remainder of the current Government's term are almost certain to be austere.
1996/1997 was the last year in which pension funds could reclaim tax credits on UK dividends. The removal of tax credits led to an immediate £2.75bn `raid' on pension funds, a raid that now continues every year. Pension funds are failing to grow at a rate to match contributors' expectations.
In a prolonged bear market, steady saving in cash could be a better option for the risk-averse than relying on the stock market to create an overflowing pension pot. However, in 2002, the proportion of national income going into savings is expected to be less than 4%. Each year, the British should be saving £27bn more than at present, according to the Association of British Insurers (ABI). The annual savings gap amounts to £700 for each of the approximate 38.6 million people in the UK aged between 16 and 64. The British are not enthusiastic about the prospect of working beyond 70, but pension shortfalls are likely to make this increasingly necessary, unless pensioners can translate their numbers into political power that sways government policy.
Caution IS TheWatchword
Caution is the watchword for UK-based companies seeking to provide pensions and pension-extending financial services for the elderly. The reasons for this include:
the extensive legislation to regulate financial services
the power of the FSA to enforce compliance
the caution shown by customers since the furore over pensions mis-selling
mistrust in pension schemes generally, now that employers are abandoning final-salary schemes, even for current employees.
Once broken, trust takes a long time to rebuild. Meanwhile, companies are reluctant to launch innovative products into a nervous market.
Confidence in pensions would improve if:
the Government reintroduced tax relief on dividends paid into pension funds
the UK decided against joining the euro, with its huge unfunded pensions liabilities
the stock market rose steadily (but not dizzily) for the next 5 years.
The Chancellor can accomplish the first task, can influence the second, but has little power over the third. SHOW LESS READ MORE >
Retirement Funds TOO Small