Falling homeownership and poor investment returns threaten the living standards of future retirees
Source - Daily Telegraph 22/04/23
Britain is hurtling towards a pensions crisis, according to a major new report, but Generation X will be the hardest hit – and is running out of time to act.
Older generations have enjoyed generous “defined benefit” schemes, a boom in home house prices and a long bull run in the stock market, the Institute for Fiscal Studies said this week.
However, the think tank said the gradual disappearance of gold-plated pensions, declining investment returns and falling homeownership means that the next cohort of workers are barrelling towards penury in retirement.
More than three million workers are failing to save any money into a pension this year, it found. But the report, which called for a major review of the British pension system, said that it was most concerned about workers in their 50s who had fallen through the gaps of the Government’s pension reforms.
Jonathan Cribb, of the IFS, said: “Someone in this generation may not have an invested pension that is anywhere near large enough, as they have not had enough time to benefit from auto-enrolment, unlike the generation below them.
“But these 50-somethings also probably do not have a defined benefit pension like the generation before them.”
Defined benefit pensions guarantee a retirement income for life, but have mostly vanished from the private sector. Most workers today instead rely on defined contribution pensions – which invest their savings over the course of their career – thanks to Britain’s “auto-enrolment” policy.
However, this system has failed to deliver investment returns as strong as first expected, the IFS found.
In the Government’s last major pension review in 2004, it predicted that pensioners could expect returns of 6pc from stocks and 2pc from bonds over the medium term.
However, this has declined to just 4pc from stocks, and negative returns from bonds, the IFS said.
Jon Greer, of the wealth manager Quilter, said that the data showed that DC schemes still fell well short of the quality of income provided by generous DB pensions.
He said: “Workers in their 50s have a much shorter amount of time to build their pension wealth in this new system.
“If they are fortunate enough to be homeowners, then their property could quickly become their largest asset in their retirement – and they may need to rely on it for income.”
However, the IFS warned a rising number of retirees no longer own their homes, with the proportion of private renters aged over 65 expected to double over the next 10 years.
Mr Greer warned that this would turn the pension plans of millions on their head, adding: “The industry’s retirement living standards, which offer a guide on how much people should save in their pension, are all based on the assumption that you will own your home when you retire.
“If this changes, then people could be undersaving for retirement by thousands of pounds.”
How to avoid disaster
Yet there is still time for Generation X to save their retirement, experts say.
Gary Smith, of the advisers Evelyn Partners, said that anyone in this squeezed generation concerned about the future of their retirement should first establish how much they could currently expect to receive in pension income.
He said: “The first thing to do is request a state pension forecast, so you can identify any shortfalls. The Government will tell you what your state pension payments will be, and from what age you can get it.
For a married couple, the full new state pension is worth £21,200 per year today, so it is a significant amount.
“Next, track down your private pensions. The Government has a pension tracing service, which you can access online. It will ask for details such as your National Insurance number.”
He added that once a saver has a clear picture of how much they have in pension assets, they can begin to plan when they might be able to retire.
“Always think about how much you need first, rather than when you want to retire. If you need £2,000 per month, you might not have enough money to retire by 55.
“Work backwards from your expenditure, and then figure out when you will actually be able to stop working.
“Remember, you do not have to stop working straight away. You can semi-retire, so you are only working a few days a week but still supplementing your private pension income.”
Mr Smith noted that the Government recently made tax rules more flexible so that someone returning to work could continue to save significant amounts into their pension.
The “money purchase annual allowance” is the amount that can be saved into a pension once it has already been accessed from the age of 55 – it was as low as £4,000 a year, but has now more than doubled to £10,000.
A Government spokesman said that auto-enrolment had transformed pensions, with more than 10.8m workers saving into a workplace scheme, and that it had supported proposals that would expand the policy to include more people.
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