February 2008

Only a 'starting point'

Two years ago, Adair Turner sent out a very stark message to the UK. Not enough people were saving for their retirement and action had to be taken. This could be working for longer, taxing people more to cover the higher state pension burden, or people saving more money. Or more likely a combination of all three.

This year is the hundredth anniversary of the introduction of the legislation backing the state pension. Back in 1909, the first payments were between one shilling and five shillings, and were means-tested. Those with income of more than 12 shillings a week didn't qualify. The qualification criteria back then appeared to be stricter than nowadays. Recipients also had to pass a moral character test!

One hundred years on and the basic state pension still forms the foundation of the UK's pension provision.

However, it was always designed to be a starting point for retirement income, leaving room and encouragement for voluntary action for people to save for their future.

Those retiring today can receive a state pension of £87, which can be topped up by pensions credit to around £120 a week. Not very much at all. So, you would have thought that when faced with such a low future income people would save for retirement. Not true. There appears to be a general reluctance in the UK for people to face up to the financial challenges they're going to have to deal with in retirement. Research carried out by AEGON showed that when it comes to money, 46% of people in the UK would rather live for today than plan for tomorrow.

A lot of this reluctance is rooted in people's belief that they can't afford to save for retirement. This is the answer most commonly given in surveys when people are questioned on why they don't save. Not that pensions are too complicated. Or charges are too high.

The general rule of thumb often quoted is that anyone just starting to save in a pension should begin with a contribution rate of half their age. For a thirty-year-old virgin-pension-saver, starting at 15% contribution can be a daunting task. Maybe it's easier just to say, "I can't afford to do that" and consign the whole idea to the 'too difficult pile'.

One way of coping with this mountain to climb is to share the pain with employers willing to contribute to pension plans. However, not everyone takes employers up on their offer of pension scheme membership. For some, saving in an employer's pension scheme may not be the right answer. But others out there may be just turning away 'free money'.

This is also a good time of year to take advantage of New Year resolutions. Many people will receive a pay rise over the next few months. By diverting those extra pounds to their pension saving they can kick start their retirement plans by using money they hadn't really accounted for and had never got used to spending.

Pension reform, with the introduction of auto-enrolment and mandatory employer contributions, should go a long way to increase pension saving, as long as the danger of levelling down existing provision can be mitigated.

However, people not actively saving in a pension isn't a problem we can choose to comfortably ignore for the next four years. If we are going to encourage people to save for their retirement we need to change the position of saving in the long list of priorities most of us have for our monthly pay cheque.

This is the Government's role and it's a tough one.

However, it has to persevere. Quite simply, because carrying on with the status quo is unthinkable. We will be consigning a whole generation to living on not much more than the state pension and a future of making tough decisions with the small income they will have. That was never the idea behind Lloyd George's 1908 Old Age Pension Act.

Rachel Vahey
Head of Pensions Development
AEGON Scottish Equitable