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Why don't you save into a pension?
There are lots of reasons people do not save for retirement. Is the government's auto-enrolment programme tackling the real problem?
by Michelle McGagh on Jan 31, 2013 at 13:04
Auto-enrolment might be the right step to kick-start retirement saving in the UK but we also need to confront our own demons and decide what a good pension looks like.
The process of auto-enrolling employees into workplace pensions started on October and plans to get up to 11 million people saving for their old age by 2018.
While it isn’t compulsory and you can opt out of your employer's scheme, it seems that 70% of people plan to stay opted in, according to research by the National Employment Savings Trust, the government-run pension scheme into which many will be auto-enrolled.
For the nearly in three (30%) of people who are left, half of them are undecided about whether they should opt out or stay in.
The research also found that nearly two thirds (63%) of people agree with auto-enrolment, and most people knew that saving for retirement is important and see auto-enrolment as a ‘critical step’ to achieving it.
Brits aren’t the most prepared when it comes to retirement, although most people said they have a retirement plan of sorts: 70% said they are looking to the state pension to fund a large part of their income; 49% planned to downsize and sell their home and move into something cheaper and 26% of people are relying on inheriting money.
None of these plans are particularly concrete and only 14% of people said they were reasonably confident their retirement plans would be adequate.
From the research it seems that we are anxious about pensions: 67% of people said they were happy auto-enrolment meant they didn’t have to worry about retirement anymore. Still, we’re doing too little about it.
So, why don’t we save for our old age?
Ask many people whether they can afford to save some more, or anything at all, and chances are you’ll be met with a ‘no’
Nest research shows that 82% of those who are not saving into a pension said they cannot afford to. A quarter of people said they have less than £50 a week left after living costs.
‘Unpensioned workers are confident short-term financial planners and budgeters. Some of them are concerned about whether they can afford pension contributions but for many pensions simply aren’t seen as a priority,’ said the report.
‘Even if they had more money, other things would take precedence. Holidays, home improvements and socialising are seen as far higher priorities.’
Nest notes that affordability may cause people to opt out of their workplace pension, it said half of people think that not missing the money taken out before they’re paid would be something that would motivate them to stay in the scheme.’
Basically, if we don’t have it we won’t spend it, so take the money before the wages go in the bank and we won’t miss it.
Tim Jones, Nest chief executive, said: ‘Despite the economic challenges, the time is right for automatic enrolment.
‘Given the current economic constraints on the household budget you might have expected opposition from consumers for automatic enrolment but our research strongly suggests that they welcome the policy.
Negative emotional response
Pensions are both dull and complicated and many people don’t want to have to think about them. The idea that pensions are too difficult is daunting and many people are scared to tackle their retirement.
According to the survey 47% of unpensioned workers say they have put off saving for retirement for fear of making the wrong decision.
Auto-enrolment is hoping to change this by taking the need to make a decision out of pensions, unless you want to opt out of course.
‘A fear of making the wrong decision has put many people off joining a pension in the past. However, the knowledge that their pension is being taken care of through a low-maintenance approach driven by their employer gives savers peace of mind,’ said Jones.
Nothing to do with me
According to Nest, pensions are ‘often simply not on people’s minds’, particularly when it comes to younger people.
‘People struggle to imagine themselves in the future and this potentially deters them from doing anything about it,’ said the report.
Although pensions are not a priority, 63% agree auto-enrolment is a good idea and those that have rejected pensions in the past still support the reforms.
Most of us will not be able to work forever, despite the increasing state pension age, particularly in manual jobs. Unless you plan to live on the £7,500 a year the state pension will provide, you need to stop burying your head in the sand.
Lack of knowledge
Half of unpensioned workers claim to have only a basic knowledge of pensions, according to Nest, and it suspects that many pensioned people are still have gaps in their knowledge.
This is a task that the government and pension providers have to take it upon themselves to rectify.
The report said: ‘People are keen to know more. While they aren’t interested in detailed information on pensions, there’s an appetite to have clear answers to two central questions: what happens to my money – where does it go and how safe is it? How much will I get at the end?’
The report states that ‘there is a general sense of unease around pensions. Many people – both with and without any previous experience of pensions – are concerned about how safe their money is’.
Consumers are concerned that they won’t get their money back and pension investment exacerbates this fear.
‘For unpensioned workers, retirement planning is all about being prudent, sensible and conservative. It’s implicitly about safety and securing the future, and therefore at odds with chance, risk and uncertainty.’
In short, people expect to have at least the equivalent of their contributions to spend in retirement.
For pension savers who are auto-enrolled, risk is negative and they focus on what they have to lose, rather than what they have to gain.
‘Uncertainty is always perceived in a negative light and suggests the possibility of a disappointing or worst-case scenario outcome, rather than the possibility of getting a better outcome than expected or even just slightly less,’ said Nest.
What is a good pension?
A decent pension is could be argued, negates all of the things that stop consumers from saving: affordable, understandable, limited risk, and relevant to their needs.
Pensions minister Steve Webb has said auto-enrolment is a good initiative but ‘does not address all the barriers to pension saving’.
He said the Department for Work and Pensions was working on creating ‘a future private pensions landscape that gives consumers high-quality schemes to save in and creates trust and confidence in pensions’.
‘With so many more people newly saving into a pension, quality is key. The introduction of Nest has already driven down charges and spurred on innovation in pension provision. We will examine issues such as charges and whether large-scale.
The National Association of Pension Funds head of policy and advocacy Helen Forrest said people needed to save into the right pension schemes.
‘Our regulatory system needs to create alignment between the provider and saver through strong governance and by delivering value for money through scale. Only then will our industry be able to start improving confidence and really delivering for members,’ she said.
Consumer group Which? has called for ‘defined quality standards’ for pensions to be established to ensure a good deal for consumers and that pension savings are not depleted by charges.
‘Setting quality standards will not be an easy task, but the alternative ‘wait and see’ approach risks damaging confidence in pensions and automatic enrolment,’ said Dominic Lindley, financial services team leader at Which?.
‘Alongside ensuring that all schemes are good quality we need to take steps to improve consumers’ ability to engage with their pension scheme. Consumers should be provided with clear and jargon-free information at every step of their pension journey, from making contributions through investment and choosing a retirement income.
‘They also need to be helped to determine how much they think they will need to live comfortably in retirement and be provided with regular updates about how far their existing pension scheme is from fulfilling their goals.’
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