January 22, 2014

Help to Save: Defusing the pensions time bomb

Help to Save finds that 11 million people are at risk of entering ‘pensioner poverty’ when they retire, and urges the government to make it compulsory for people to save for later life.

The report shows that someone earning the average wage (£27,000) will need to save over six times more than they currently do to generate the government’s recommended retirement income of £16,200. The average pension pot is estimated to be just £36,800, which on current annuity rates is enough to generate a retirement income of £1,340. The paper says that an average earner would need a pot of £240,000, assuming they receive the full single tier pension.

The report says that one way to defuse the demographic time-bomb is through a new ‘Help to Save’ scheme. This would make it obligatory for people to save for their retirement by removing the opt-out in the existing auto-enrolment scheme while also increasing individual contributions to pensions as their incomes rise over time.

The paper supports the recent introduction of auto-enrolment but warns that even with 8% contributions flowing into a pension on a regular basis people will not be able to save enough for their retirement. Over a 40 year contribution period, using the 8% contribution rate, someone earning £27,000 would likely be able to save around 55% of what they need to generate the target retirement income. That figure drops to 40% if that individual takes their tax free lump sum when they retire.

Latest figures show the urgent need to act swiftly:

  • The proportion of people aged 65 and over is projected to increase from 17% to 24% over the next 50 years.
  • The proportion of people aged 85 and over is projected to treble from 2% to 6% in the next 50 years
  • Long term care and pensioner benefits will total some 12.4% of GDP in 50 years time – nearly a 50% increase compared to today’s level of 8.4%.
  • 1 in 7 people who retired in 2013 intended to rely entirely on the state pension. While 1 in 5 pensioners will be below the poverty line.

‘Help to Save’ would work by:

  • Ending the opt-out currently available to private sector employees under the government’s auto-enrolment scheme unless the individual can show they have sufficient funds already in their pension pot. To date only 1 in 10 employees have opted-out but this level may rise as smaller firms are incorporated into the scheme.
  • Including an automatic escalation in the auto-enrolment system where a proportion of any increase in pay has to be allocated to a pension contribution until pension contributions reach a higher rate. Ideally a 12% contribution rate should be targeted over the next five years rather than the 8% rate currently in operation.

The paper also recommends a major shake up of the annuities market to increase choice when people hit retirement age:

  1. The government should issue annuity type government bonds, which retirees could buy instead of the normal annuities. That would give clarity on the interest rates that were available in retirement. Insurance companies and other pension providers could then offer products that would provide income after the bonds had expired. In this way you could break out the life insurance and interest parts of the annuity.
  2. The government should allow up to 50% of the minimum income requirement above the state pension element to come from a source other than annuities. That source would be in the form of an income drawdown from an equity or mixed asset fund. That investment would have to be a quoted and approved investment and we would limit the drawdown to the yield on that investment. That would give pension fund holders the chance to conserve their capital as well as receive an income.


James Barty

Senior Consultant to Policy Exchange, Financial Policy, 2011-2013

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