In line with our risk management framework, today we published our Q4 2019 performance update.
The UK pensions gap and you
Most people thought that Brexit would have dominated the 2017 General Election (GE) agenda for the leading parties, but many other issues bubbled to the surface. Among them has been that of Britain’s plans to cope with an ageing population, which most notably came to the fore by virtue of controversial manifesto pledges regarding social care, and how to pay for it.
Although major reforms in this particular respect were quickly dialled down by the Conservatives, the saga did at least succeed in opening up some wider debate on what promises to be a burning question for years to come: just how exactly are we going to pay for our ageing population, and for the privilege of living longer?
The IMF estimates that life expectancy at 65 is likely to increase by around one year per decade, with average life expectancy currently standing at just over 81. Indeed, some experts predict that there will be 1.5 million centenaries in the UK by the end of this century, while babies born today are expected to live until 104.
Effect on the state pension
Social care is obviously one aspect of policy that will come under strain from these staggering statistics. But another is that of the state pension, which also proved to be a divisive issue during the GE campaign. Indeed, the cost of providing state pensions has rocketed since 1970 from 4 per cent of UK GDP to 9 per cent, and the rising life expectancy rate will only compound this.
Quite simply, other things equal, there is only so much the state can afford to shell out on the state pension, and, in order to be able to sustain it, both incoming and future Governments will either need to reform the state pension system, increase the age at which people can receive it, or lower the overall amount. Or all of the above.
How successful a political party would be in implementing significant reforms remains to be seen – especially so after the hullabaloo surrounding the so-called triple lock over the past couple of months. But what it does mean is that it becomes increasingly ill advised for those of working age to rely on the state pension as their sole or chief source of retirement income.
Saving, saving and more saving
The best way to safeguard your future retirement income is to take more responsibility for it. This is dependent on three important things:
1) Earnings – a steady income to save for retirement
2) Savvy - knowing where to put your money
3) Luck – who knows how savings, stocks and pension portfolios will perform over the coming decades?
While the third element above is beyond your control, you can certainly take a high degree of initiative over the first two. It is advisable to save at least 5 to 7 per cent of your annual earnings, although the signs among younger workers are not too promising, particularly with regard to millennials. Research by Zurich found that 27 per cent of 18 to 24-year olds put nothing away towards retirement, while our own study earlier this year found that one in six people in this age bracket think they will never be able to retire.
Nevertheless, for those who are able to put money away, it is also vitally important to house your savings wisely. The Lifetime ISA, and the Government-backed bonus it encompasses, has emerged as a new mainstream option, with the first cash version of this account being launched earlier this week. However, the tax relief and benefits associated with private or company-backed pensions mean this form of savings avenue remains an appealing one. As for any additional savings you may have, it is important to ensure that these do not sit idle, and that you are able to earn the best rate of return possible, relative to risk that you are willing to take on.
A look to the future
By no means should any of the above spell doom and gloom. Younger workers may feel hard done by given that they will likely need to work for longer than previous generations, but the reality is that, with increased life expectancy, comes a longer period of retirement. And there is no reason your golden years can’t be safe, secure and enjoyable - it is merely just a case of ensuring that they are adequately funded.
The new Government will need to grapple with a growing pension savings gap in the UK – set to increase from £6 trillion to £25 trillion by 2050, according to the World Economic Forum. This will no doubt be a recurring issue for its successors too.
But, at individual level, all we can do is take care of things at home. That means saving diligently, adequately and with a dose of good old nous too.
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