The UK's senior citizens - the great unloved?

There are more of them than ever before, and the numbers are only going to swell even more in the future. And although they put so much back into society – at least £25 billion a year – a third of them believe the UK society treats them badly.

Over the past few months, I’ve been working with MGM Advantage on a report that looks into the financial and emotional well-being of the UK’s older generations. ‘Our Retirement Nation’ delved under the skin of today’s senior citizens to find out how they spent their time, what their greatest worries and regrets in life were, and how they think they fit into society today.

On the whole, I thought it made positive reading. Yes, life is tough, and lack of money and failing health are the two biggest worries. Today’s older generations don’t want to be a burden on others and they worry about how to make ends meet.

But they are generally a happy and content bunch.

The biggest number fell into the category that was able to maintain the same lifestyle in retirement, as well as treat themselves occasionally. They don’t live the high life. Instead of wining and dining they might stay in and watch telly or go – when invited – around to friends and family. But they seem to be enjoying themselves, and the freedom they have.

So, I reckon that sounds OK.

Looking at the research, there were three big areas that hit me square in the face. All of which, we – and by that I mean the financial services industry – can do something about.

1.       The first was the practice of buying an annuity was far from perfect. Almost a third hadn’t heard of the open market option (31%). Which is frightening. A fifth didn’t realise the negative impact of inflation and over a half (54%) were not aware of any way to offset it. So, imagine where they will be in 20 or 30 years’ time. And 72% didn’t know that even mild medical conditions like high blood pressure could get them a higher income through an enhanced annuity.

Obviously, we are a long way off getting this right. This part of the UK population should be more aware of the choices they face and the risks they undertake. And this responsibility falls at our feet. All of us should be doing more to educate people approaching retirement and get them to seek out the best way forward. Because they are not automatically going to wake up tomorrow saying “today I must use my open market option to buy an annuity, on the best market rates, preferably on enhanced terms. Now what’s the web address again for Money Advice Service’s annuity tables?”

2.       Secondly, the question of how to fund long-term care is being brushed under the carpet. Almost half the survey didn’t envisage having to use private wealth for that purpose – either thinking they were going to rely on the State or not even having a clue how to solve this problem. But nearly a fifth planned on using the children’s inheritance (wonder if anyone had told the kids yet?), and 26% were going to use the value of their property.

Problem is most of them have already earmarked the property as either a pension top-up plan, a children’s inheritance, or a contingency fund if it all goes horribly wrong. Or more likely all three. And that’s if they can bring themselves to sell up at all. That £100,000 equity is expected to go a long long way.

3.       Lastly, the biggest regret people had was that they had not saved enough in their working life. You can’t make a silk purse out of a sow’s ear, and the nasty truth is unless we get more people to save more money, many more will fall into the ‘restricted’ category according to MGM’s wonderful description of how the Retirement Nation is made up, rather than ‘aspiring’ or ‘comfortable’.

 

And that’s why automatic enrolment is the make or break deal it is. Delaying enrolment for all employers and putting full contributions on hold for another year is less than ideal, to say the very least. But the big question is how to keep the momentum going. To keep people talking about what’s happening and why automatic enrolment has been introduced. And – crucially - to keep them from opting out.

 

To merely rely on inertia and apathy is the wrong approach. It may get people into saving. But it won’t keep them in saving. And it won’t stop them from opting out, once somebody close whispers in their ear that they can save 3% of their wage packet. And it won’t get them saving enough money to have the kind of retirement so many both want and need.

An Autumn (Statement) Chill in the Air

“We’re not heading for a recession” asserted George Osborne this lunchtime in the Treasury’s Autumn Statement for 2011. Reassuring news? But then he proceeded to paint a miserable economic picture for the UK for the next few years, with growth barely bumping along the bottom. And that’s if the plan actually works.

Public sector workers will be (understandably) outraged that their pay – frozen for the last two years – will be capped at 1% for the next two. And although Osborne made a last-ditch plea with the unions to call off tomorrow’s strike, you got the feeling it will fall on deaf ears. The low pay outlook will only make them cling on to their incredibly generous pensions even more.

But we got a reminder of the nation’s increasing longevity with the announcement that state pension age will rise to 67 between 2026 and 2028 – eight years earlier than the plans set out in the Pensions Act 2007 – saving the UK a staggering £59bn.

This rise in state pension age was not a complete surprise. But the announcement stopped there. You could have expected the Government to also outline the increase to age 68 by 2036 (instead of the planned 2046). But as it didn’t, more cynical minds might wonder if it just wants to keep that ace up its sleeve. And play a rise to 68 earlier than 2036 at another time. Maybe it’s time we stopped second guessing when Governments will make state pension age changes, and just put it into the hands of an permanent independent pensions commission to make alterations as and when, given rising UK and world longevity.

At least with this announcement, people have 15 years to plan. This should give them enough time to put in place their retirement plans to take account of the changes. We all – government, advisers, and providers - need to do more to make sure people know when their state pension age actually is. So many people are still assuming 65. And hopefully this will be tackled as part of the automatic enrolment communications plans next year.

Elsewhere in pensions, mercifully it was fairly quiet. Despite the perennial rumours to cut the amount of tax-free cash people can take, or to reduce tax relief (further) on pension contributions, neither announcement materialised.

Enterprise Investment Schemes were given a boost and now give more tax relief than pensions, reminding us all there are various ways to invest for the future. But as their scope is limited, and many people don’t understand them, it’s likely they will continue to be a niche investment.

Finally, the Government intends to introduce retrospective legislation to curtail the amount of tax relief given on employer asset-backed pension contributions. It appears some employers have been making asset contributions to plug holes in defined-benefit pension schemes and through a loophole claiming double the tax relief. Stopping this, HM Treasury reports, will save £500m. Which makes you wonder how widespread the practice was or how big the assets were!

But we still get back £500m in the UK purse – and let’s face it, we need every penny.

To delay or not to delay . . .

With less than a week to go to the Autumn Statement, the airwaves are buzzing with rumours about the Government’s latest financial plans. Alongside the usual stories of cutting pensions’ tax-free cash, the Daily Mail today reported automatic enrolment for firms with less than 40 employees will be put back about a year.

There’s no doubt times are hard - and about to get harder – for a whole host of people in the UK, and small employers, the lifeblood of industry, must be feeling the pinch at the moment. So, I can understand why this might be seen as a Good Idea by those wishing to cut these employers some slack.

But I think, although it’s well-intentioned, it’s misguided.

Automatic enrolment is being introduced to help those millions of people who just haven’t got around to starting to save for their pensions. Survey after survey shows us that people are nervous about saving, reluctant to start, and often citing unaffordability as a reason, without thinking about the consequences of what not saving at all means for them. Automatic enrolment should be a lifeline to them. What we need to do is to educate and persuade people to kickstart the savings habit, however, unsavoury it first appears to them.

Smaller employers aren’t due to start automatic enrolment until 2014, once the bigger firms have already taken the plunge, automatically enrolled millions, and hopefully gone a step towards making saving the norm. And when they start they are being asked to contribute 1% the first year, 2% the next, and only then 3%. So softly softly to help finances.

It was hoped this approach would make the contributions more manageable.

If we really want to help these employers, then I would suggest another approach. I don’t know if you have had occasion to look at the Pension Regulator’s pages on automatic enrolment, but it’s scary! The whole thing is a minefield. Just waiting to trip you up with rules and regulations about how to deal with employees (or workers, eligible jobholders and non-eligible jobholders), and what information to send out to whom and when.

Yes, let’s make it easier for employers. And let’s start by looking again at this quagmire, while we still can, and simplify it to make it more outcome-based. Because complying with these complex, and some would argue unnecessary, rules is where the time, effort and pain of smaller employers is going to be felt. Not the 1% contribution.

Rachel Vahey

25 November 2011

@RayVay