In recent years the government has taken a number of steps that have changed the landscape for pensions. The main change is that greater responsibility for long-term financial planning has been passed to the individual.
While the government has made a raft of changes there are some groups that may miss out. Those in their 20s and 30s could miss out on long-term pension benefits because they are increasingly paying costs such as child care, housing and other expenditure. This is particularly worrying, because as the Fawcett Society specifically suggests, many young women saddled with debt from their time at university also carry the burden of child care costs and are forfeiting future planning and well-being. Instead many women are relying on their partners for financial security during retirement. As it stands about a third of women are not part of a pension scheme, while the number for their male counterparts is about a quarter.
The reliance of some women on their partners is also worrying because according to statistics from ‘Relate’ 42% of marriages end in divorce, with the average age of divorce being 45 for men and 42 for women. For some women this means that up to this point they may have placed on hold their pension contribution and/or their career stagnates because of the other commitments. When divorce does happen women may have to fight for a share of their partner’s pension despite putting the needs of others ahead of their own during the earlier stages of their marriage when childcare, housing costs and other outgoings may have been the priority.
The Office for National Statistics estimates that there is already a shortfall in pay, the median difference in pay is that women typically earn about 9% less than men. This gap is even more troubling when we consider that pensions tend to reflect career earnings and so in later life this financial gap between men and women continues or increases, because of earlier actions related to pension contributions. For a society that prides itself on equality the result is that women are further disadvantaged.
As a vehicle for dealing with the long-term pensions saving gap, the government’s introduction of Auto Enrolment (AE) pension has been encouraging and the opt-out rates are low. While recent reforms could be a positive influence on attitudes towards pensions, this is by no means guaranteed. It seems that AE is pushing individuals in an advantageous direction, but contribution rates remain lower than necessary to fund the retirement that individuals are seeking. Research by Ipsos Mori suggests that individuals are wildly out in their estimates as to the amount they need to save to achieve their desired retirement income. This is a concern because research from the Institute for Fiscal Studies also shows that individuals are expecting to retire earlier. Although there is a retirement expectation, many individuals have given little thought to long-term financial planning, with the Department for Work and Pensions estimating that a significant percentage of workers are facing inadequate retirement incomes. More than half of those aged 50 to 60 reported that they have never thought about the number of years of retirement they may need to fund. When in retirement the replacement rate, which is the ratio of income in retirement to income in work is important, and if individuals do not save enough then expectations will not be met. The newly introduced flat rate state pension, while attractive for some, means that not all will qualify for the maximum pension. The Pension Policy Institute and others have shown that those in their 20s and 30s are likely to be worse off under the new flat rate pension.
When we consider the various changes in pensions, it is safe to say the jury is out as to whether individuals will save enough to fund the length and life-style they expect during their retirement. It is crucial that all individuals start saving as early as possible and as much as they can, if they want to achieve the life-style to which they aspire, during their retirement.