12th May 2015

Scottish Widows: Retirement savings: encouraging trends

The first 18 months of automatic enrolment could hardly have gone better for the Government.  Most employers met their obligations on time, and opt-out rates for employees were in single figures, which was far lower than expected.  But simply getting people into pension arrangements must be seen as a start, and not as an end in itself.  The benchmark for the tenth Scottish Widows Retirement Report is 12% of earnings saved from age 30 to state pension age for those not expecting their main income to come from a defined benefits (DB) scheme.  This will not provide a luxurious retirement, but should give an acceptable living standard.  For average earners it is almost twice the automatic enrolment minimum, but includes employer contributions and non-pension savings designated for retirement. 

On this basis, 53% of our samples in 2014 were saving adequately, up from 45% in 2013.  The average amount being saved by those not in DB is at its highest ever level in the last 10 years at 10.2% of earnings.  The main drivers of the change are:

• The percentage relying mainly on a DB pension for their retirement provision has increased from 46% to 51% in the public sector.

• The average savings ratio has increased from 9.6% to 11.1% in the private sector.

• Among employers with 250 or more staff, the average savings ratio has increased from 9.7% to 11.6%.

This reveals that the groups who had gained the most were those who had been through automatic enrolment when the survey was conducted in March 2014.  However, automatic enrolment appears to have had little impact on those who were not saving at all.  The percentage of non-savers in the population is 19%, down by just 1% from 2013. 

The Budget in March 2014 dramatically changed the picture of retirement.  But how will consumers take advantage of the new flexibility?  Our findings on this were quite surprising:

• 30% don’t know what they’ll do
• 7% plan to purchase property to let
• 11% think they’ll buy an annuity
• 11% expect to take the cash
• 13% plan to do drawdown
• 28% would like cash to fund their early retirement but a guaranteed income later.

It looks as though a significant number may opt for drawdown followed by annuity, which is a very sensible strategy for many but raises the issue of where they will get guidance from in the period before they annuitise. 

In summary, the results this year are very positive, and we could well see further improvements this year as automatic enrolment continues.  The challenge is to persuade non-savers to get into the habit of saving for retirement, and for everyone to be aware that the automatic enrolment minimum isn’t nearly enough for a comfortable retirement.  Action is also needed to improve the position of the self-employed.  One option there might be to give similar National Insurance exemption on contributions as applies to employer payments into pension.

Government can help in promoting pension savings, but the most significant step might be to give certainty on the future shape of pensions, with cross-party support.  We have seen enormous change in recent years, and there remains a strong likelihood of further changes to the tax regime.  If and when that happens, a period of stability in legislation would give the many changes made a chance to succeed.

The biggest single challenge will remain ensuring that individuals receive appropriate education and guidance.  For many, automatic enrolment with some guidance on how much they should save will be enough, but there will be an increasing need for professional advice, particularly as fund sizes build up and people have complex decisions to make around retirement.  The impartial guidance promised by the Government will help, but full personal advice will be required for many, and this provides a great opportunity for advisers.                              

Retirement, Auto-Enrolment, Pensions