UK government make significant changes to pensions
- Young people more likely to struggle during retirement due to changes to pension scheme changes
- Equity release demand expected to jump higher as retirement plans change
- UK government hikes minimum private pension age
- Pensions could become a growing target of mis-selling claims and scams
According to official government figures, the average income of all pensioners today is almost double than 25 years ago – up from GBP 168 per week in the 1994-95 financial year to GBP 331 in FYE 2020.
While this indicates that more people can achieve the retirement they may have always dreamed of, UK government statistics also show that the change in growth was relatively similar to average pensions in FYE 2010 at GBP 319 a week.
Hargreaves Lansdown Personal Finance Analyst Sarah Coles also suggests that the situation will likely become bleak for young people.
She warns: “If you’re working now and expecting your retirement to shine just as bright as today’s retirees, you could be in for a horrible shock.”
Sarah Coles notes that younger employees will have to navigate various factors to build a decent pension, including higher living costs, longer life expectancy, rising house prices and debt – primarily from mortgages.
As trends that determine financial futures are changing, she said employers and the broader pensions industry should do more to ignite the younger generations interest in retirement saving so that they can build decent pensions.
Factors that may hinder building a decent pension
According to Sarah Coles, the following trends could influence your pension pot and cause your retirement income to become stretched.
Final salary pension schemes becoming less common
There has been a significant shift away from final salary pensions or defined benefit pension schemes in today’s contemporary society, primarily due to the commitment burden it places on employers.
However, this means that most workers entering retirement will receive less generous workplace pensions and, as a result, will need to increase their contributions or take advantage of other schemes to boost their pension pots.
Reduced pension contributions
While millions of employees now contribute towards their pensions thanks to auto-enrolment, rarely do workers ever increase their contributions, which could set them back when they retire.
Employer contributions in an occupational defined scheme are also relatively low, with averages between 2-4%. Sarah Coles notes that workers should aim to contribute 12.5% of their monthly earnings to build a decent pension pot.
Life expectancy has increased
Although the COVID-19 pandemic has caused average life expectancy to plunge to its lowest levels since 1940, the crisis aside, many people are expected to live longer lives, meaning the period for which we are retired is also longer.
According to the United Nations projections for world life expectancy, the global average for 2021 is 72.81 years – an increase of 0.24% on the previous year.
Meanwhile, Public Health England (PHE) released provisional estimates revealing that the average life expectancy in England was 82.7 years for women and 78.7 for men years in 2020 – a clear indication that pension pots will need to stretch further in the years to come.
The minimum pension age is changing
Not only has the age at which you claim your state pension increased, but the UK government has also hiked the minimum private pension age, and both of these are set to rise further.
Hargreaves Lansdown Personal Finance Analyst Sarah Coles highlighted the difference between the minimum state pension age in 1940 at 60 and the current state pension age, which rose to 66 in 2020 and is expected to jump up to 67 years in 2028.
She added: “In reality, workers in their 20s may not get their state pension until their 70th birthday – or later.”
UK government hikes minimum private pension age
During a consultation in February 2021, the UK government reconfirmed plans to increase the legal minimum pension age from 55 to 57 in 2028 to reflect “increases in longevity and changing work patterns.”
While pension experts appreciate the theory behind hiking the minimum pension age, acknowledging changing trends such as life expectancy and mortgages being paid off later, many, including Quilter, have warned of the “chaos” and “confusion” it could cause.
The multinational wealth management company Quilter has urged ministers to reverse the new legislation, stating it has been implemented with little consideration about how it might alter behaviour and affect younger savers.
Quilter also noted that safeguarding workers with a protected pension age of 55 with “transitional arrangements” risks provoking those without this as they may feel they are being mistreated.
Quilter has advised the UK government to leave the minimum private pension age unchanged or raise it to 57 for all rather than implement transitional arrangements to avoid confusion.
Jon Greer, head of retirement policy at Quilter, stated that increasing the minimum private pension age to 57 only adds to the hurdles savers will need to overcome to build a decent pension.
A finance expert warns that younger workers and those who lost income or jobs due to the coronavirus pandemic will be significantly disadvantaged. Even if you work to close the gap, most will need to increase their working hours to make up the difference.
Pension planning likely to undergo a significant change
According to the latest research from the Equity Release Council, retirement plans are likely to undergo significant reform due to changing trends and hikes to the minimum pension age.
The non-profit organisation expects a substantial increase in equity release demand as retiree priorities are changing.
With flexibility becoming a prime concern for retirement-aged consumers, the Equity Release Council believes more retirees will utilise equity release products that would allow them to access funds tied to their property and boost their retirement finances.
As people can access equity release from 55, experts expect it to become a more integral part of retirement planning over the coming years, especially following the hike to the minimum pension age.
According to recent data, the UK’s private property wealth hit GBP 6TN in 2020 – the highest on record. Housing experts have attributed Chancellor Rishi Sunak’s stamp duty holiday as the reason for growth and rising property prices, with the average home in the UK now valued at GBP 249,633.
However, people reviewing retirement plans are being urged to watch out for online pension scams and financial mis-selling as the new financial year gets underway.
Experts across the industry have called on tech firms to crack down on scam adverts and other false advertising and raise awareness of pension fraud, noting that older people are particularly vulnerable to fraudsters.
According to Action Fraud, more than GBP 30million was lost to pension scammers in three years to August 2020, albeit members say the actual total is substantially higher.
Before saying yes to any pension provider, especially those offering a time-pressured deal, do some thorough research and check the company credibility.
If you’re registered in an overseas pension scheme, make sure to notify the HMRC about payments from saving plans and check to see whether pension tax rules have changed so that you are penalised.