Action is needed to address the fact too many of us aren’t saving enough – or even anything – for our pensions.
Pensions are not exactly one of the sexiest financial topics around, yet there are few more important ones.
If you want to enjoy some level of comfort in your later years, once you give up work, then you will need to have a plan and for most of us that involves a pension.
However, there are huge issues with the way our pensions work ‒ and the way we interact with them ‒ which make achieving that all the harder.
A new report from Standard Life has laid bare the huge challenge facing all of us in building a pension that will actually last us throughout retirement, irrespective of how long that may be.
Facing a huge retirement shortfall
First and foremost, people aren’t saving setting enough aside to achieve their retirement goals, leaving them facing a huge shortfall.
The Standard Life survey highlighted how respondents had hoped to build up a nest egg worth £250,000 by the time they retired.
However, the average amount they actually ended up saving was just £131,000.
Perhaps unsurprisingly, many of these retirees (54%) regret not setting more aside over the course of their careers while many also wish they had started saving earlier (53%).
Dean Butler, managing director for retail direct at Standard Life, said of the report: "Clearly there’s a big gap between what people hope to save, and what they actually do – this is unsurprising, particularly when looking at it during a cost-of-living crisis.
"However the result can be a significantly reduced standard of living in retirement."
An earlier study by the Institute of Fiscal Studies (IFS) paints a similarly bleak picture.
It found that around a fifth of those working in the private sector do not save anything each year, particularly those who are on lower incomes and so do not qualify for automatic enrolment in the workplace pension scheme.
Even those that do save, are only putting in modest amounts.
Back when the Pensions Commission put forward the idea for the workplace pension scheme in 2004, it suggested that around 15% of earnings would need to be saved, yet 87% of middle-earners are paying in less than that.
In fact, almost two-thirds (61%) are saving less than 8%.
While obviously saving something is always going to be better than saving nothing, it still means that when retirement comes an awful lot of people are going to be faced with some tough choices over their money and how they spend it.
Check out our run-through of how much you need to save for a comfortable retirement.
The self-employed quandary
The IFS report highlights a particular issue when it comes to the self-employed.
It noted that currently, just one in five people who work for themselves are contributing to a pension, compared with one in three in the early years of the century.
That’s a big drop off, and is only made worse when you consider the general fears around the amounts that people are saving anyway.
In other words, few self-employed workers are paying into a pension, and those that are probably aren’t saving enough either.
Indeed, the IFS points out that self-employed people who do save tend to stick to fixed amounts over a number of years that may not reflect their own incomes.
I can certainly vouch for this from my own experience.
The reality of working for yourself is that incomes can be incredibly volatile, so you don’t necessarily want to overcommit yourself to sums which will become unaffordable.
So you put aside a sum that you know you can definitely afford each month. And you perhaps tell yourself that on good months, you’ll top it up further, though in practice that rarely actually happens.
There is no workplace pension scheme for self-employed people, no additional contributions from bosses, which also dents the appeal of pension saving.
If you are employed, a lot of the work around getting started with saving into a pension is done for you, but if you are self-employed you’re on your own.
Little wonder then, particularly at a time when money is so stretched across the board, that few believe they can afford to save into a pension.
Saving into a workplace pension: all you need to know
Making our money last
The way that our pensions are structured also presents additional challenges.
The days of defined benefit pensions, where you have an idea of what you’ll be getting when pack in work, are behind us and replaced by defined contribution pensions.
As the IFS points out, all of the risk with a defined contribution pension is shouldered by the saver ‒ it is down to where my money is invested, and how that investment performs.
You could save 15% of my earnings or even more, but if you put it in duff investments you will end up in a rough spot when you retire.
Working out how to tap into that money is also tricky.
How much do you draw down at any point, so that you can ensure it lasts for the entirety of your life?
The pension freedoms have opened up more options for savers, but making the right decisions are far from straightforward.
Solving the pensions problem
Ultimately there isn’t a straightforward answer to our pensions system.
We are in the dreadful position of having a State Pension that is both insufficient, but resented by younger people because of the scale of increases guaranteed through the pensions triple lock.
We have a scheme that pushes people to save, but even if they do they probably aren’t saving enough, nor necessarily engaged enough with where that money is going.
And we have whole chunks of the workforce, millions of people, who are cut off from some level of pension support and guidance that they so badly need.
If we are to put this situation right, it is going to take time, and more importantly, it’s going to need a consistent approach from successive Governments.
There can be no dramatic changes of policy after each general election, or kicking the can down the road.
In the end, it is in the Government’s interest for us all to have a decent pension income, whether from the State Pension, private pensions or both.
It means we are less reliant on other benefits, able to live a happier, healthier life.
But that will only happen if the Government recognises these issues and takes action to make tangible improvements.