UK faces 'lost generation' of pension savers
The UK faces a generation of people who are failing to prepare fully for their retirement.
Many young people are failing to understand how much they need to save to maintain their standard of living in retirement - and are just choosing not to retire.
Daniel Barnes looks at why young people should bother saving for retirement.
The difficulties facing those now entering retirement - with stock market drops wiping away sometimes as much as 30 per cent of pension funds and then annuity rates dropping with low interest rates and high longevity rates - make those starting a pension now feeling there is little reason to bother.
A pension fund of £50,000 in 1990 would have provided a pension income for life of about £150 a week from the age of 65 for a single man.
In 2000, a pension fund of £50,000 would have bought you an annuity income of only about £87 a week.
Today, it would buy just less than £65 a week.
The prospect of having to save massively, not being able to touch the savings until 65 or even later is turning many people off the idea altogether - placing their hopes in the state, inheritance, property or even a lottery win.
A person who invests £100 a month in the stock market at aged 23 could have a pot of money worth £537,868 by age 65, according to figures from Motley Fool.
Delaying saving by one year - and the pot is worth £491,401. This may seem like a big pot, but it must get your through decades of retirement.
It is the lower paid who are also failing to save for retirement.
Data from the Office of National Statistics show 21 per cent of men and 32 per cent of women with gross weekly earnings of less than £300 were members of an employer-sponsored pension scheme, while 76 per cent of men and 82 per cent of women on gross weekly earnings of £600 and over belonged to an employer-sponsored pension scheme.
Much of the problem rests with the assumptions pensions started with.
The first pension was provided by Germany in 1889 for those at the age of 70. At the time life expectancy in Germany was 35 years for a man.
Now the burden on the state is much greater as life expectancies grow and grow. With less money to go around, looking after yourself is necessary.
In the 1970s, the UK government even looked at phasing out the state pension as it was assumed people would be covered by company or private schemes.
David Thompson, at Axa Winterthur Wealth Management, explains people will need an income in retirement otherwise they have to fall back on the state pension.
"Pensions are still the most tax efficient way of saving," he says.
He explains there is now other ways for people to save that can let them take a 25 per cent tax-free sum on retirement.
When you pay into a pension, normally there is also tax relief. So when you put £100 into the pension, a further £20 is added - based on the basic rate of tax.
Those offered a pension from their employer - who may match contributions - is also receiving an effective pay rise.
This week, the Association of British Insurers (ABI), has also launched a new campaign - People Need Pensions- to convince people about the benefits of long-term savings.
The body claims for most people the answer over whether it is worth savings for retirement or not is a "very definite 'yes'."
However, sales of pensions in the first quarter of this year are down. The ABI reported a 10.5 per cent drop in sales.
Jonathan French, at the ABI, explains making a decision about your pension is making a decision about your quality of life in retirement.
"If you want a pension for more than the most basic expenses and provision to be comfortable then you need to save," he says.
"It is very difficult for people to imagine so far into the future, but it is important to think about the consequences of having more than enough to survive."
"It is the choice between a comfortable retirement or poverty."
What puts many people off is the very size of a pension pot they need to prepare for retirement.
However, Mr French explains people are investing for the long term - and money is not only coming out of their own pocket but also from the government and their employer.
"We estimate there are five million people who are in jobs that could be members of a pension scheme but are not," he says.
"They are foregoing free money from the employer and the government. It is not just your own money going into the fund, you are getting money for nothing from the employer and from the government."
He adds people should not be put off by the large sizes of pension pots they need to acquire as over time the investments will see returns beyond the contributions.
"Pensions are by definition long-term investments, and the longest anyone will have. If you start savings in your mid-20s, you are going to be saving for up to 40 years."
Over such a period of time, he urges people to have faith in stocks and shares as they tend outperform other investments - despite the recent scares pensions have created.
"In the short-term it can be messy, with shocks to the stock market, but over the long term the investment is likely to perform very well," he explains.
The first stop when planning a pension should be to look at a company stakeholder pension.
Stakeholder pensions are designed to be simple with lower fees.
Your employer is likely to make a contribution to the pension along with the tax. While many people might think saving in an ISA is simpler, the tax benefits are much lower.
But, of course, you can get hold of the funds more easily.
People are advised to look at having savings they can get to in case of an emergency on one hand, and longer-term savings for retirement on the other.
Putting all eggs in one basket can mean you are losing out.
Private personal pensions also exist with a wider range of options and areas to invest in.
The best advice is to seek advice from an independent financial advisor. They can take you through when you want to retire, and what standard of living they want to have in retirement.
From there, they see how much they need to put by to reach a pension fund that is big enough.
Those who have already started to save are being urged to not stop.
While it may sound easy to save to yourself that you will re-start when the prospects are rosier, in fact a year-break usually extends and getting back on the pension horse can prove tough.
Ian Naismith at Scottish Widows explained the big issue is that, despite good intentions, people stop but do not start again - especially after a year they do not find themselves better off.
He has also seen an upturn in people stopping paying into their pensions.
"Our experience is that if people are not actively prompted to start, they put it off and off, just like going to the dentist," he said.
"It is much better to reduce contributions if you need to, but keep going."
He adds much depends on how old you are and how long you have been contributing for.
"If you are in your 50s and have only been saving for a limited time, there can be quite big effects when it comes to retirement."
Mr Naismith suggests if people are worried about redundancy, they may be considering cutting back but it was important to carry on saving, for example in an ISA where funds can be used if need be.
It is also worth noting older pensions may not allow payments to be switched off, but more modern ones and stakeholder pensions should.
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