Belonging to an ethnic minority or being a home renter are just two of the factors putting people at risk of insufficient pension savings, according to a new report. We take a deeper look at who is more likely to be retirement-ready, and who may need to save harder. Article by Nick Green.

Worried about your current rate of pension saving? If you’re a white male Brit with a mortgage, working in the public sector full-time on a permanent contract, and earning over £30,000 a year, then your answer may be: not really. In fact, you’d fit the profile of the person most likely to be saving adequately for retirement. But if you don’t tick all those boxes, you may have more cause for concern.

This is according to the Retirement Report 2020 from Scottish Widows, which delves annually into the state of retirement planning in the UK across all demographics and age groups. The report delivers the encouraging news that a record number of Brits are now ‘saving adequately’ for retirement – in that they are more members of pension schemes than ever before, and 60% of people over 30 are saving at least 12% of their income into pension pots, or have the equivalent in defined benefits pensions. However, the research has uncovered some significant inequalities across the UK workforce, with some sections of the population far less likely to be saving enough to retire on. Moreover, the Covid-19 pandemic is in many cases making these inequalities even more stark.

Identifying those most at risk of low pension savings

The Scottish Widows research compared different people’s different circumstances and lifestyles to see how these might affect their ability (or inclination) to save for retirement. It found that factors associated with adequate pension saving included:

• Being an employee (i.e. not self-employed)
• Being a homeowner
• Working in the public sector
• Working full time
• Earning over £30k
• Being white British
• Being male

Just as it’s easy to picture someone who ticks all these boxes – and who therefore can probably look forward to a comfortable retirement – the reverse holds true too. With the exception of people who have no paid work at all, the person most at risk of struggling in retirement might be a woman from an ethnic minority, in rented accommodation, self-employed and working part time in the private sector. Plenty would fit that description, but any of these factors either alone or combined may be hindering people’s retirement saving.

Being a homeowner is one of the biggest factors that enables people to start saving for their retirement in earnest. Conversely, many of those still trying to save up a deposit seem to be sacrificing their pension contributions in the process. This isn’t generally a good strategy, as it can also mean missing out on employer contributions, as well as tax relief and compound interest.

Women have traditionally struggled to save as much pension as men, mainly due to lower average incomes and career breaks, and may also be over-reliant on partners’ pensions. The good news is that women are catching up, with the report finding that 59% of women are saving adequately, only 1% behind men. Still, women are significantly more likely to feel unprepared for retirement.

However, by far the biggest factor is whether someone is employed or self-employed. The report shows that 65% of employees are managing to save at least 12% of their income into pensions, but this drops to just 39% among the self-employed. There are many potential reasons for this, the main ones being that the self-employed don’t get employer contributions, and that they are less likely to have pensions at all. Auto-enrolment means that all qualifying employers now join a pension scheme by default, but self-employed people must set up their own. Many are clearly never ‘getting around to it’, even if they can in principle afford the pension contributions. There are signs that more contractors are taking out private pension plans – but every day of delay means less income in retirement.

The pandemic’s impact on pension saving

The Covid-19 pandemic and resulting lockdown have thrown another huge obstacle in the path of those struggling to save enough pension. Some industries have been far more seriously affected by the pandemic, most notably the restaurant and hospitality sector, but also construction, high-street retail and the arts. Education and healthcare have also taken a hit, but these sectors typically benefit from strong pensions, so the impact is generally confined to present-day income. Other hard-hit industries are not so fortunate; the hospitality sector especially suffers the double-whammy of a Covid shutdown combined with some of the UK’s least generous pension schemes. Only 18% of restaurant workers are optimistic about retirement, compared to 34% across all industries.

Workers who have been furloughed will found that their pension contributions have reduced. The cut to 80% pay reduces the amount of an employee’s salary that is ‘pensionable’, i.e. used to calculate contributions, so the net effect is to reduce pension contributions by 25% (even though the pay cut itself is only 20%).

Furthermore, some workers facing a 20% loss of income will have felt they had no choice but to opt out of their workplace pension scheme for the duration, in order to maximise their take-home pay. Those compelled to do this are most likely already in the risk groups for low pension saving, and this pause in contributions will only widen the savings gap they face. Anyone in this position should aim to re-enrol on the pension scheme at the earliest opportunity, for despite the cost, the cost of not doing so is eventually even higher.

Self-employed people – already the highest-risk group in terms of lower pension saving – have also borne the brunt of the economic impact. The report finds that 43% of self-employed people have suffered a drop in income due to the pandemic, and the furlough scheme for the self-employed has been far less generous to date. This is yet another pressure discouraging this group of workers (around 5 million) from saving into pensions.

Finally, according to Unbiased data, some workers aged 55 or over have resorted to drawing on their pension pots to supplement their income, probably sooner than planned. Although they may have seen no alternative, this too can seriously damage future pension saving, by triggering a lower cap on the amount you can save.

Tips for improving your pension saving

It’s clear that, despite auto-enrolment significantly improving the situation since 2012, pension saving can still be something of a lottery. A lot depends on the generosity of one’s workplace pension scheme, or – for the self-employed – receiving advice early enough to set up a personal pension in good time. And all savers depend on simply earning enough to make sufficient contributions while meeting everyday living costs.

Bear this in mind, there are still simple guidelines that anyone can follow to improve their pension saving.

1.  Just do it

The sooner you start saving into a pension, the more money you’ll build up. It really is that simple. If you’ve left it late, don’t give up and assume it’s too late. The tax advantages of pensions means that they beat most other investments hands-down, so even just a few years of saving will boost your finances considerably. And remember: even a little saving can snowball into large amounts if you do it regularly for long enough.

2.  Make the most of employer contributions

Check the details of your workplace pension scheme (if you have one) to see how employer contributions work. They may be fixed, but many schemes offer contributions that rise in proportion to your own. Sometimes an employer will match what you pay in, and sometimes will even double it. Make the most of this – if you have a generous scheme, it pays to contribute as much as you can afford to get this bonus benefit.

3.  Check you are in the best fund for you

When you’re auto-enrolled, your money will be invested in a default fund. This is a fund designed to suit all members equally, regardless of age or life stage. This means it probably won’t be the best fund for your particular circumstance. Find out what the alternative options are, and see if switching might be better.

If you have a personal pension, you can do the same sort of thing. For instance, if you are relatively young, you can afford a higher-risk, high-growth fund, since you won’t be drawing the money for several decades. Move into lower risk assets as you get nearer retirement.

4.  Claim higher rate tax relief when you can

If you earn enough to pay higher-rate income tax, you can claim 40% tax relief on pension contributions. However, this doesn’t happen automatically – you’ll need to do it via your tax return. This is particularly relevant for self-employed people whose income may fluctuate. Make sure you claim all the tax relief you’re entitled to in your high-income years.

5.  Don’t de-prioritise your pension

When times are hard, it’s natural to want to make cutbacks. But do try to economise in as many other areas as you can before reducing your pension savings. Otherwise you’re simply depriving your older self of income, and you may need the money even more by then.

6.  Wait as long as possible before accessing your pension

Time is money when it comes to pension saving. The longer you can save, the more time there is for growth to build up. Similarly, your pension needs to last for the whole of your retirement. Although you can draw it from the age of 55, it’s prudent to wait until you’re retired or semi-retired before accessing it. Accessing a pension also greatly reduces the amount you can save into pensions, so bear that in mind too.

7.  Seek independent advice

Any pension saver can benefit from consulting an independent financial adviser (IFA) on how to make the most of their pension. However, this is particularly important if you’re self-employed, and perhaps still without any pension savings. Seeing an IFA will motivate you to take action and make you fully aware of your options, from stakeholder pensions to SIPPs. Your IFA can also take care of the process of setting up and even managing your pension for you, saving you time and effort.

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