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Why you have to save and shouldn't rely on the state pension
A report by the Organisation for Economic Co-operation and Development spells out why we have to save more, work longer or do both if we're to make ends meet when we're older.
by Michelle McGagh on Jun 15, 2012 at 11:12
Workers who save into a private pension can enjoy an average of 60% of their earnings as an income in retirement, 10% more than those who are planning to rely on the state pension, a new report has found.
The Organisation for Economic Co-operation and Development (OECD), an international body that helps governments tackle economic issues, has said the current pensions landscape is unsustainable, and it has made a number of recommendations to boost the UK and other countries’ woefully inadequate savings rates.
Calls for compulsory pension saving
In its Pensions Outlook 2012, one major change it champions is introducing compulsory pensions saving in developed countries. It argues that reforms have cut public pension pay outs by between 20% and 25%, and says those working today should not rely on the state pension. It estimates that a typical worker can expect to receive half their net earnings as a state pension if they retire after a full career and at the state retirement age.
The average state pension in the UK is currently around £11,000 a year, the same amount a full-time worker on minimum wage earns each year.
The OECD notes that in countries that have made private pensions saving compulsory, workers can expect to retire on 60% of their earnings each year.
It also warns that pension poverty could increase dramatically if people continue to sideline saving for their old age.
However, it admits that compulsory saving could be seen as another tax, particularly by those on lower incomes, and said the halfway house of auto-enrolment, where workers are automatically enlisted in pension schemes but have the opportunity to opt out, could be a good solution.
The UK government will from October 2012 be auto-enrolling all employees who are not in a workplace scheme into one with the hope of boosting Britain’s ailing savings culture. Everyone will have the opportunity to opt out and must continue to opt out every three years, although the government is hoping that inertia will keep many people in the scheme and get people who would otherwise have saved nothing to put something aside.
Laurie Edmans, a trustee of the government-run National Employment Savings Scheme (Nest), into which many workers will be auto-enrolled, said saving would be tough for some people to contemplate given the economic conditions but that auto-enrolment was needed to kick-start the savings habit.
‘We are looking at austerity, and it would be wrong to think that the climate does not affect [savings] but despite that we need to start auto-enrolment as it is the best for the majority of people,’ he said.
Edmans said the earlier people started saving the better, and that a person who begins pension contributions at age 30 will have 50% more in their pension pot when they retire than someone who starts saving at 40 but retires at the same age.
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