Review to assess pension risks of future retirees

Today’s pensioners are doing better than any previous generation. But with signs that future retirees may not fare so well, a new Pensions Review will consider what needs to be done to secure decent retirement outcomes for current working-age generations.

Since 2009, the average income of pensioners has been similar to that of those under state pension age, for the first time in history, and poverty rates among pensioners are lower than the population average. Meanwhile, more employees are saving into workplace pensions than ever before.

Over the last 20 years, however, there has been a continued decline of defined benefit (salary-linked) pensions in the private sector, as well as the abolition of state earnings-related pensions, low interest rates, falling homeownership, low typical contributions to defined contribution schemes, and a collapse in pension saving among the self-employed.

‘Considerable risks’

Under the pension freedoms introduced in 2015, savers can withdraw some or all of their pension pot as a cash lump sum, take regular or occasional income payments, or use some or all of it to buy an annuity — or a combination of these options. While this has given people flexibility in what they do with their pension savings, there is no longer the same degree of longevity-risk-sharing that defined benefit pensions and annuities provide, the Institute for Fiscal Studies (IFS) said. As a consequence, individuals, rather than employers or insurance firms, now bear the burden of the risk of poor investment performance and uncertain lifespan.

Currently, a man aged 66 is expected to live for a further 19 years, but 13% can expect to survive until age 95. The equivalent figures for a 66-year-old woman are 21 years with 20% making it to 95.

“Most private sector workers are left having to manage considerable risks — not least over how long their retirement will be — which for many will be incredibly difficult to balance well,” said Paul Johnson, director of the IFS.

Pensions Review

A wide-ranging review of the pension system has been launched by the IFS, in partnership with the abrdn Financial Fairness Trust, to look at the effects of changing economic conditions and public policies on the future of financial security in retirement.

A fresh look at the retirement saving environment is “long overdue”, Johnson said. He pointed out that although automatic enrolment has brought millions into workplace pensions, most people need to be saving more in order to have a comfortable retirement. Among middle-earning private sector employees who are contributing to a pension, 60% are saving less than 8% of their earnings, and almost 90% of them are saving less than the roughly 15% of earnings that Lord Turner’s Pensions Commission thought more appropriate.

At the same time, the number of self-employed people is growing considerably, yet fewer than one in five are saving in a pension. This compares with around a third when the Pensions Commission reported.

And a growing number of people approaching retirement live in more expensive, insecure, private rented accommodation.

Difficult decisions

Underlining the need for financial advice, the IFS warned that people who retire with defined contribution pension pots “face considerable difficulty and risk in managing their finances through retirement”.

“There are risks of running out of private resources or of being so cautious that people have a needlessly austere retirement,” the think tank said.

“While pension freedoms do give people the opportunity to take control of their own finances, even for the most numerate the decisions on how to draw their pension wealth — which need to be made right through retirement — are difficult.”