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Why UK pensions remain underfunded

7 July, 2021

Sponsored by

Willis Owen

How is it that investing is presented as sexy and exciting, yet pensions are complicated and dull? They are literally the same thing, just wrapped up differently and clearly one in dire need of better publicity. Getting old is inevitable; having an income that fails to cover your basic needs is not.

Jason Chapman, Managing Director of Willis Owen

The UK retirement landscape faces a number of economic, social, psychological and operational forces which, when unpicked, leave little wonder around the low level of engagement among consumers – especially those at the younger end of the market.

The benefits of saving into a pension from a younger age – even a modest amount on a regular basis – are well documented and yet still pensions remain hugely underfunded.

Trust and complexity are two main reasons for the lack of engagement. Because the UK enjoys a state pension system, people often wrongly assume that will provide a sufficient amount to live on (it is currently £179.60 per week [1]. So as a society we’re growing up with an inherent laissez-faireapproach to pensions for the simple reason we don’t think we’ll need to do anything over and above what is provided for us. Or we avoid the potentially uncomfortable topic altogether so our collective state of confusion worsens, raising the need for guidance and advice. Yet we tend to not trust much of the guidance and advice on offer because we think it’s coming from people and organisations with a vested interest!

The UK pensions system, and taxation around it, are renowned for being among the most complex in the world. Add to that a financial sector steeped in tradition and a penchant for tedious jargon, you can see how the disconnect will become exacerbated.

The entire concept of retirement is arguably out of date. Jobs for life are a thing of the past as portfolio careers grow in popularity and the gig economy is set to rise. Britons will have, on average, 11 jobs throughout their lifetime [2] and with each of these may well come a pension – either run as a workplace scheme or offered as a personal pension.

As we move through career changes and take on new initiatives, there runs a risk that our total pension savings becomes increasingly fragmented and difficult to manage.

Phased retirement is a growing concept, with around half of adults aged 50+ rejecting the idea of a ‘cliff edge’ retirement [3]. It’s no longer about working towards the day you turn 65 and the workforce gather round, presenting you with a carriage clock as you head off to improve your bridge game, improve your golf handicap or other such cliched ideas.

But more freedom, flexibility and having a pension work more effectively to meet your needs requires people to take an interest in it.

With auto-enrolment, the Government attempted to ‘step in’ and steer people’s hand towards greater uptake. While this made a bad situation better, the Government subsequently introduced so-called Pension Freedoms, giving would-be savers even more to think about.

Even for those who have taken up a pension at some point (and a quarter [26%] of UK adults never have[4] ongoing interest has a tendency to dwindle. Reports suggest there are around 1.6 million unclaimed pensions pots in the UK, worth a total of £19.4 billion. We’re literally being given free money (in the form of tax relief) and still millions of us can’t find the means to get involved. As well as changing jobs, house moves are a big factor. According to a recent study from the Association of British Insurers, only 4% of people let their pension provider know when they move house, compared with 85% telling their doctor or dentist, and 66% informing their bank.

Just to recap: we know saving earlier is likely to lead to a bigger pot with less effort due to the benefits of compound interest; many of us underestimate how much we’ll need to live on in retirement (or don’t have a clue what that figure might look like); we’re typically living longer; we get tax relief on our contributions, in most cases employers are required to contribute to pensions on our behalf (there’s that ‘free money’ again); you can take your pensions with you when you leave a job and eventually streamline multiple pensions into one simple administration system to make your life easier manage.

Yet still take-up is limited.

One view is people find it difficult to see the benefits of something that is happening to their future self because they don’t technically exist yet. Investment choices and calculated contributions need to be relevant now, spoken about in language that means something to their present self rather than arbitrary numbers, dates and amounts relating to some distant point in the future.

How is it that investing is presented as sexy and exciting, yet pensions are complicated and dull? They are literally the same thing, just wrapped up differently and clearly one in dire need of better publicity. What lies at the heart of the issue - is it the words ‘pension’ and ‘retirement’? Do they conjure images of a life we don’t necessarily want because we want to stay young, agile and healthy and just live for today? Does that unearth a deeper fear – that the concept of saving up for the longest holiday you will ever have is fundamentally flawed, as you might not get there?

Getting old is inevitable; having an income that fails to cover your basic needs is not.

With this in mind, at Willis Owen we created One Plan – a tool which allows you to bring together multiple pensions into one place under our award winning Self-Invested Personal Pension (SIPP) product. All you have to do is provide us with the details of your existing pension pots and we take care of the rest. Once consolidated you have access to a range of tools designed to help you understand whether you're on track for the retirement you want. 

I’m sure most of us didn’t think about our own mortality when buying our first home. Apart from a place to live, it also meant (given house prices over time) we had an asset that could either fund the next purchase or would be ours when we decided to eventually take that long holiday.

So, regardless of what we call it, we can - when motivated to do so - plan for a better future. Perhaps we need the same mindset for our retirement (Ooops, just said it!)

More information

Willis Owen is authorised and regulated by the Financial Conduct Authority. With pensions and investing, your capital is at risk. The value of investments or income from them may go down as well as up and you may get back less than you originally invested. Tax treatment depends on your individual circumstances and may change.

[1] https://www.gov.uk/government/publications/benefit-and-pension-rates-2021-to-2022/benefit-and-pension-rates-2021-to-2022

[2] https://www.gov.uk/government/news/thousands-more-make-contact-with-long-lost-funds

[3]https://www.aegon.co.uk/content/ukpaw/news/half_of_uk_workers50shuncliffedgeretirement.html

[4] https://www.fca.org.uk/publication/research/financial-lives-survey-2020-appendix-a.pdf