Updated 03 December 2020
Research reveals that a fifth of Brits still have no pension savings at all, and people near retirement aren’t doing much better. But it’s never too late to benefit from pensions, as Nick Green explains.
One in six Britons who are within sight of their retirement still have no private pension savings, and consequently are missing out on the opportunity to make their life after work more comfortable. At least 17% of people in the UK aged 55 and over admit to having no pension savings (other than the State Pension), which is only slightly better than the average for Brits as a whole – 21% of whom say they have no private pensions.
This is according to research1 by Unbiased.co.uk, which found that an alarming number of people are effectively ‘sleepwalking’ towards their retirement without adequate preparations. The study also found that nearly half (45%) of all Brits hope for a retirement income of at least £20,000 a year, and 61% hope for at least £10,000 – despite the maximum state pension being just £9,110 a year.
There are signs that as people grow older, they are becoming aware that a lack of pension savings is a problem – though perhaps not quickly enough. The issue is most visible among adults aged under 35. Nearly a quarter (24%) of this group claim to have no pension savings at all, despite being a generation to benefit from auto-enrolment into workplace pensions. After 35 this drops to one in five, and then to one in six for the over-55s. Clearly, people do start to save more as retirement draws nearer, even if they have missed out on the opportunity to save over many years.
Lack of pension savings is a particular issue for those not in full-time employment. Encouragingly, just 8% of respondents who worked full time said they had nothing in their pension. But among part-time workers this figure was one in four (24%), indicating that part-timers face a potential pension deficit when they retire. But the people worst affected tend to be those not currently working at all – whether because they are unemployed or because they are full-time parents. Nearly 60% of this group said they had no pension savings. Where this is because of full-time parenthood, the parent in question may be relying solely on their partner’s pension in later life. This is a risky strategy, both because that pension may not be enough for both of them, and because of the risk of relationship break-up.
Another concerning statistic is that one in five people simply don’t know how much they have in their pension savings. Curiously, this uncertainty grows rather than shrinks as people get older: while 14% of under-35s are unsure, this rises to 22% between the ages of 35 and 54, and then to 24% among the over-55s. In a way this isn’t surprising, as many people may lose track of workplace pension schemes from previous jobs, or forget about them entirely. It’s important for people to track down these old pensions and if necessary consolidate them into one pot, for ease of management.
However, the fact that people tend to lose track of pensions over the years should prompt us to look again at those earlier findings: the people who said they had no pension savings at all. The research didn’t question people about how sure they were of their answers, but it seems likely that at least some of those who said they had no pension savings were mistaken. Even before auto-enrolment, many employers offered workplace pensions, and new employees were often encouraged to join the schemes. In the confusion of starting a new job, many thousands may have filled in pension scheme application forms without thinking much about it, and may have forgotten ever doing so. Such individuals may therefore have substantial pension savings by now, and if they have moved jobs and changed addresses since, they may have no idea that these pension pots exist.
Lost workplace pensions are therefore like a positive form of the old PPI scandal – where people were paying for insurance they didn’t need and didn’t know they had. In this case, huge numbers of people may have pension pots they don’t know about, and be much better prepared for retirement than they thought.
It may be the case that many of those who think they have no pension savings are wrong, and that they do have pension pots from previous jobs (or even their current job) that they don’t know about. The first step for anyone who thinks they are pension-less is to contact the government’s free Pension Tracing Service and search through their previous employers to see if they were ever a scheme member.
However, some people will reach the age of 55 (the earliest age that someone can access pension pots) and find that they genuinely have no pension savings. But this isn’t a reason to give up and assume it’s too late. Although a person close to retirement has a lower chance of saving enough to provide a substantial income, pensions can help your money to go a lot further. If you start to think of a pension as just a very powerful tax-free investment vehicle, you can benefit from one even in the very short term.
The reason why is that everything you pay into a pension benefits from tax-relief, which effectively increases it by 25% if you’re a basic-rate taxpayer. And this increase is instant – before any fund growth has taken place – meaning that a pension is a more effective money-grower than almost any other mainstream investment. After this, you can factor in tax-free growth on the pension fund, which will typically be much better than any interest you can achieve from a cash savings account.
Here’s an example of how a pension can be valuable even to someone starting one near retirement:
Jeff is aged 55, hopes to retire in 10 years, but realises he has no private pension. Self-employed and earning £30,000 a year, he starts a private pension, deciding to pay in 7% of his gross income (£175 a month, deducted before tax). Assuming he does this for the next 10 years and achieves average growth of 4% (realistic, though not guaranteed) he’ll end up with a final pot of over £32,300. However, he will have paid in just £21,000. To match that performance, any ordinary investment fund would have to return a consistent 8% interest per year.
If Jeff were to access this small pension through a drawdown scheme, he could potentially take around £2,100 a year from it until he is 88. Although this isn’t much, it would be a valuable income boost on top of the state pension, and in total he might be able to withdraw around £49,000 (because the drawdown fund continues to earn growth). This is an impressive return from just a £21,000 investment – Jeff ends up more than doubling his money.
There are a lot of figures in the example above, along with several tricky concepts such as tax relief and compound interest – all of which go towards calculating final pension income. Fortunately, if you want to estimate the return from your pensions, you don’t have to do these sums yourself. The Unbiased Pension Calculator lets you predict your eventual income just by entering your current level of savings and contributions, along with your age and the age you hope to retire. As you can see from Jeff’s example, you can see a substantial benefit from pension saving even if you do leave it to the last few years.
Talk to your financial adviser about the best ways to save and access your pension.
1 Survey by Unbiased and Opinium of 2,000 non-retired UK adults, conducted June-July 2020.
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