- Last week the government’s revived Pensions Commission published its interim report, warning that around 15 million people are undersaving for retirement
- Other key findings included that 3-in-10 private pensions are accessed from the minimum pension age and that just 4% of wholly self-employed people are saving for retirement
- AJ Bell has looked at 10 other findings you may have missed in the report
Sarah Coles, head of personal finance at AJ Bell, comments:
“The Pensions Commission interim report published last week was a hefty tome, bringing together reams of research and reports to provide a panoramic view of the UK’s pensions landscape. In amongst 190 pages of pensions analysis there were some less widely reported pension trends that will impact people in retirement. We take a look at 10 of them.”
- The cost of renting in retirement
“More people are renting later in life, and as more are likely to end up still renting in retirement, this will have a substantial impact on their costs. The report quoted Pensions Policy Institute (PPI) research showing that by 2041 the proportion of retirees living in private rented accommodation could rise from 6% to 17%. The PPI also found that a single pensioner can easily have to save more than £200,000 extra in their pension than a homeowner to cover the cost of private rent in retirement. This is a group that is commonly undersaving even when housing costs aren’t factored into the equation.”
- The payback potential
“The report calculated that for every £1 they pay into a workplace pension, someone earning £13,000 a year gets £4.28 worth of payback. The bulk of the additional value comes from investment growth, plus the employer contribution and the tax relief. This also factors in that their higher income would mean fewer state benefits in retirement. If they were in the private rental sector in retirement, they would also lose housing benefit, but they would still be left with £1.46 in payback for every £1 paid into their workplace pension. It’s a powerful argument for prioritising pensions where possible, even on a lower income.”
Source: Pensions 2050: Evidence and Future Priorities – Interim Report
- The Universal Credit trick
“If you are working and receiving Universal Credit, there’s a trick that makes contributing to a pension even more valuable – if you earn above the work allowance. This is £710 a month if you have no housing support or £427 a month if you get housing support.
“If you pay into a pension, your contributions are subtracted from earnings to see if you breach the allowance. Given that your Universal Credit is cut by 55p for every £1 you earn over the work allowance, you can pay £100 into your pension and get £55 more in Universal Credit.
“In addition, when calculating the value of your savings and investments to see if you are over the £16,000 savings limit, none of your unused pension pots are counted.”
- The lifestyling lottery
“Investments in a workplace defined contribution pension often use what’s known as lifestyling, where investments are moved into traditionally less volatile assets as you get closer to retirement age. However, there’s not one accepted way of doing this, so different providers will gradually move money over into less risky assets at different rates and times.
“The DWP Provider Survey found that the longest lifestyling process took 24 years and the shortest five years, while research from Corporate Adviser found that de-risking started on average 13.9 years before state pension age.
“The right approach will depend on your needs, when you want to draw an income from your pension, and whether you plan to do it all at once or gradually. If investments are de-risked too fast, you’ll miss out on potential growth, and if it’s too slow, you could end up with major losses close to retirement. The issue is that because some pension investors are unaware of the variations, they may not know to check the lifestyling approach of their provider.”
- The consolidation consideration
“Pension consolidation can be incredibly valuable, helping you keep track of all your pension savings. The report also highlighted that it can help people make better decisions too. People with small pots are more likely just to take them all out at once, because psychologically they think of them as completely separate pots of cash. Bringing them together helps people make more holistic decisions based on all their retirement savings and their needs.
“There are some well-known issues around consolidation, including the importance of checking that you’re not losing any valuable benefits. However, the report highlighted a lesser-known issue: FCA research has shown that a third of those who had consolidated their pots hadn’t considered fees and charges when they selected their new provider. Charges should always be considered – alongside value for money.”
- The tax-free cash blunder
“The report raised concerns about how many people take their tax-free cash, especially given the fact that so many of them don’t have enough in their pension pot to start with. It highlighted that a significant proportion of people are doing so without any particular need for the money, quoting FCA research that showed 27% of people just put the money in a savings or current account – where they not only lose their protection from tax but also face far lower potential growth.”
- The gender pension income trap
“The horrible gender pension gap is well known, but what’s less well explored is the difference in how women tend to take an income from their pension pot. DWP analysis shows that women are far more likely to take their pension as one single lump sum, are far less likely to buy an annuity, and are more likely to be dissatisfied with their decisions.
“This is likely to owe a great deal to the fact that women tend to have smaller pension pots, and the smaller they are, the more likely they are to be withdrawn in full. However, if that money is put somewhere it can’t attract as much growth, or where it faces higher taxes, it can give them even less to live on in retirement.
“The fact that fewer women buy annuities, which offers guaranteed income, means that women – who are more likely than men to opt for lower risk approaches with their money throughout their working life – are suddenly taking the higher risk option. On top of this, the fact they are more likely to have regrets demonstrates how important it is for everyone to have the support they need when deciding how to take an income from their pension.”
- The index-linked annuity pay off
“When a retiree opts for an annuity, they can choose a level annuity that pays the same sum for life, or an index-linked one that rises with inflation. The index-linked annuity will pay significantly less at the outset: the report says a 65-year-old with £100,000 can get an annual income of £7,700 from a level annuity, compared to £5,400 for an annuity linked to inflation.
“Four in five people opt for a level annuity, partly because it can be easy to overlook the damage that inflation can do. However, the damage is substantial. Between 2015 and 2025, for example, someone with a level annuity income would have lost over 27% of the buying power of their income.
“Sensible annuity decisions should involve weighing up the lost income in the early years with the higher income later. Anyone wrestling with this calculation might find the report’s calculation helpful that it takes 19 years for an index-linked annuity income to overtake that of a level annuity – assuming 2% inflation. In times of faster inflation, the pay off will be sooner.”
- The overlooked annuity risk
“Those who opt for an annuity have to decide whether they want it to pay out until their death (single life), or until they and their spouse have both died (joint life). This can be crucial for couples with very uneven pension pots, who rely heavily on one pension. If the person with the bulk of the income takes out a single annuity and dies first, it can leave their spouse in dire straits.
“The fact that two thirds of policies taken out are single life means there could be a worrying number of people facing this risk. The report noted that those not adding cover for their spouse were likely to regret it. They often said they were overwhelmed with how complicated the decision was, and that they had been swayed by the fact the single life annuity offered a higher annual income, without fully appreciating the longer-term implications.”
- The inheritance delay
“When calculating what they have to live on in retirement, some people will factor in a potential inheritance. However, the report highlighted key risks of this approach now people are living longer on average.
“People are waiting longer to inherit. The average age of people when their last‑surviving parent dies is 58 for those born in the 1960s, and is expected to rise to 64 for those born in the 1980s. Therefore anyone hoping to retire early on the back of an inheritance may find themselves waiting longer than they expect.
“Living longer lives means older people spend more during their lifetimes. They’re also more likely to have health issues, which could mean they have to spend down any potential inheritance paying for care. Plus, they may decide that leaving an inheritance to someone in their 60s is a wasted opportunity, and leave it to the next generation instead.”
