Cutting savings not the answer when times are tough

When times are tough belt tightening is necessary. But what to cut? One in five of those coming up to retirement has decided to reduce retirement savings – by as much as £342 a month, according to new research.

And the outlook is not good. Some 17% of over-50s don’t want to work past the age of 65, according to life company LV=, but may be forced to do so, due to a lack of pension provision. The squeeze on pension savings has accelerated in recent years. The average fall in monthly pension contributions over the last year is more than double that made by those in, or nearing, retirement in 2009, (£137), and is also greater than cuts made in 2010 (£324). This is not good news.

Current pressures limits saving

Against this background it is hardly surprising that just over a quarter of those not already retired expect to retire later than they had originally planned and 27% say they are unsure when they will be able to retire. The pressure to save enough money is heightened because a third are still being approached by their children for financial support.

‘These figures suggest that retirees are placing a higher importance on dealing with more immediate financial strains rather than considering the longer term,’ said Ray Chinn, LV= head of pensions. This is not surprising to anyone who has borne the cost of university education and subsequently suffered adult children hanging around the home because they cannot afford to move out. Many parents prefer to make interest-free loans or give their children the deposit on a flat just to get some peace and quiet.

The situation is not helped by the fact that returns on savings whether it is in a straight deposit account or a tax-free ISA are not good – at a time when inflation is roaring away at around 5% and eating into spending power. No wonder people are cutting back on pension savings. 

Many equity-based pension schemes have not been brilliant either with the FTSE 100 languishing at just under 6,000, never having regained its 1999 all-time high of 6,930. Some have called it the ‘lost decade’ in investment terms. The survey shows that 60% are concerned about the reduced level of income that savings will provide in retirement and the impact on savings of the current low interest rates. 

Need to save recognised

What is surprising is that although people are cutting their pension savings, the majority recognise that financial security is the key to a happy retirement. A survey by HSBC Bank found that not having to worry about money in retirement was cited as the second most important consideration by 70% of those questioned – beaten only by ‘keeping your mind sharp.’

Although people are saving less for retirement, they are well aware of the detrimental effects of this and they are pretty well clued up on why things will be tough. The HSBC research found that nearly one-quarter expect to be much worse off than their parents in retirement. This rises to nearly one-third of those without a financial plan. 

And they are aware of why there will be a drop in their standard of living compared with their parents. Some 58% said they would be worse off because the state pension was as not generous as it used to be, while 63% were concerned that their generation had not saved enough for retirement. In addition, 57% are concerned that company pensions are not as generous as they once were – which is undoubtedly true in most cases.

The HSBC survey found that 93% claimed having enough money to live on in retirement as important, but only 60% said they felt adequately financially prepared. The preparedness gap in the UK is emphasised by how worried people are about being able to cope financially in retirement – 62% said they were either slightly or very worried. Those who had made a financial plan were likely to be many times more prepared than those who had buried their heads in the sand.  Average retirement savings are £53,000 but those who had made a plan averaged £123,000.

Cutting savings not the answer

So is it wise to cut pension savings? Clearly not. If you can afford to continue making contributions you should do so - although you should always prioritise ISA savings first, unless you are a member of a company pension where your employer is making contributions. You can take tax free income from the accumulated ISA funds in retirement and Isas are more flexible than pensions because in an emergency you can get at your money. 

Pension and ISA saving is important but clearly families must prioritise essentials such as mortgage repayments, household utilities bills, travel costs to work, food and children’s’ clothing. You may be able to consolidate expensive credit card borrowing with a cheaper loan. But it is worth thinking about how much you are spending on cigarettes at around £6.50 for a packet of 20 and alcohol, which has gone up substantially since the Budget increases in duty. Indeed, the rising cost of food and utilities remains the top worry of the over-50s with 79% citing this as the main reason for their growing fears about retirement.

What emerges from all pension surveys is that those who take an interest in their finances and make a retirement plan will face a much more comfortable future than those who stick their heads in the sand. For those who want to take action now to improve their financial well-being in later life, HSBC has devised a five-step checklist based on its research.