After the British economy defied disaster forecasters and narrowly avoided a recession, the British economy faced another, more treacherous one in a dream threat: workers are chronically unprepared for retirement.
Economists predict that an aging population and a lack of retirement savings mean we are doomed to a crisis.
The fallout will ruin UK growth prospects, says former pensions minister Baroness Altmann.
“Over the next 10 to 15 years, the UK could see a steady decline in growth as more and more people reach the stage in life where they are trying to live off their retirement savings and are not getting enough,” she warns.But since economic growth in Britain has stalled, is there a risk that this will lead Britain into a recession? “Absolutely,” says Altmann. “Where will growth come from?”
Back in 2012, then-Chancellor George Osborne revolutionized retirement savings by introducing automatic enrollment. This system meant that anyone aged 22 or over earning at least £10,000 had to be placed in a workplace pension scheme.
Prior to automatic enrollment, only 55% of employees eligible for receiving a pension, received a pension at the workplace; according to the Ministry of Labor and Pensions, this figure has risen to 88% by 2021. In real terms, this meant that £33bn more was saved on private employment pensions in 2021 than in 2012.
But this policy alone is not enough to save millions of people from retiring with little to no livelihood.
2,505 high-income people are not enough
The DWP estimates that 38% of all people of working age are not paying enough into their pensions, meaning that 12.5 million people will not be able to retire comfortably.
This calculation was based on a person's conversion of the full value of their pension into an annuity. If people were to take a lump sum and annuitate only 75% of their pension, the number of people without pension would increase to 14.1 million.
Both of these numbers are still relatively optimistic. Based on the retirement comfort benchmark set by the Retirement and Life Savings Association, 88% of all adults of working age fall short of this level. This means that even one in eight people working today will not be able to retire as they expect.
This raises the serious risk that an entire generation of people who have reached the end of their working lives will not have the means to feed themselves into old age, warns Lord Alistair Darling.
“There is a real problem with which people when they stop working, they turn fifty and realize they can never save enough to finance their retirement. What we need to do is give people the opportunity to save,” adds the former chancellor.
“Automatic registration was a very good start. But, unfortunately, the vast majority of people do not save enough in these schemes. Only one in five in defined contribution programs are on track to a decent standard of living in retirement. It's too little,” says Lord Darling.
The pressure on public finances will be enormous. “There is a certain risk of not saving for retirement, and this risk is exacerbated by inflation. Obviously, this is fraught with a burden on the state and people who are going through a very difficult old age, ”says another former chancellor, Lord Norman Lamont.
“Given that in most cases we provide medical services for free, this is a problem for public finance,” warns Carl Emmerson, Associate Director of the Institute for Financial Studies (IFS).
Between 2021 and 2020 2071, Government spending on a combination of state pensions, retirement benefits, health care and adult welfare will rise from 15.8% of national income to 27.1%, according to the Office of Accountability. This means a 71% increase
2505 under pressure
Any failure to conserve properly will be greatly exacerbated by demographic change. The IFS estimates that the UK population is aging to the point where the national retirement age needs to be raised to 70 to keep the current retirement age at 24%.
The UK is more affected than the rest of Europe because our public pension provision is much lower, Altmann says. While this means that the immediate burden on taxpayers from an aging population will be less, the economic losses from insufficient retirement savings will be much greater.
“The more older people who are poor and cannot spend, the worse it is for the rest of the economy.” ”, she adds.
Not only will retirees spend less, but they will also become increasingly dependent on benefits. “Then everyone loses, the economy loses, they get worse, and future generations end up worse because lower growth today means worse results in the future,” says Altmann.
The alternative is that older people may not be able to retire at all.
“If people don’t have enough money in retirement, they are more likely to work longer hours than they might expect,” says Ruston Smith. who was Co-Chair of the DWP Auto Enrollment Advisory Board in 2017 and is now Non-Executive Chairman of Smart Pension and Tesco Pension Fund.
What needs to be changed? The Smith Board made two key recommendations, which have now been put forward by the Government in the Private Members Bill: lower the age of automatic enrollment from 22 to 18 and extend it to all incomes, not just those in excess of £10,000 a year. .
These measures will help, Smith says, but policy makers must tread carefully during a cost-of-living crisis. He warns that pushing people to make larger contributions could lead many to stop using pension plans altogether.
“Today, people have a difficult choice between paying their day-to-day bills and paying off debt while continuing to contribute your pension. Smith says.
Workers are already refusing automatic enrollment, with waivers rising from just under 8% to 10% in August 2022. “Increasing contributions too quickly could encourage more people to drop out and break the habit of saving, losing a valuable employer. contributions and tax credits,” says Smith.
There are also two key problems that the automatic enrollment program doesn't solve,” says Emmerson. First, a large number of people do not fall into the target group.
The self-employed sector is a growing black hole in UK pensions.
“The total number of self-employed people has grown since the late 1990s, but we have much lower pension contributions,” adds Emmerson.
Second, even those who are enrolled don't save enough.
Most employees who have been retired at the workplace through automatic enrollment are saving at the default rate, while almost two-thirds are saving less than 8% of their earnings. This is slightly more than half of the recommended 15%.
Pension funds need to be overhauled to redirect more investment into the UK economy and provide higher incomes for pensioners, Altmann says. She also adds that the pension industry should be more accountable.
The amount needed for a comfortable retirement
“They should reach out to customers and help them do more. The pension industry is like a chick in the nest, waiting for someone else to feed it,” says Altmann.
“That's what automatic registration is. A couple of years ago it got them all these millions of customers on a plate. Well, now it's their turn to reach out to customers directly and encourage them to do more.”
A DWP spokesperson says, “We support proposals to further expand auto-registration, allowing millions to save more sooner. .
“These changes will particularly benefit groups of people, including women, youth and low-income people who have historically found it harder to save for retirement.”