If 2014 has taught us anything, it is to take a better look at pensions and the money we will have when we eventually hit retirement. In March this year, the retirement industry as a whole was hit with a massive overhaul when chancellor George Osborne announced there should no longer be the need for retirees to own an annuity. Since then, new types of retirement income vehicles have been launched with more anticipated.
It’s common knowledge that people in general do not save enough for their retirement. The government has been reluctant to address the shortfall – particularly as people are living longer and retirement is costing more. So auto-enrolment was effectively born to automatically put people into a workplace pension, with the option to opt-out should they wish.
In what is now the second biggest overhaul of pensions legislation to hit the industry in decades, auto-enrolment has been ongoing for two years. Within four years everyone will have to be enrolled into a workplace pension scheme, with the option to opt-out.
More recently, the Treasury announced in October it is set to give savers even more freedom over how they take money from their pension pot tax-free. Pensioners will have the flexibility to draw down their pension pots in chunks, and from April 2015, regular withdrawals of 25 per cent will be tax-free, with the remaining 75 per cent taxed at marginal rate. This also means that savers will be able to access their funds whenever they choose, with every withdrawal coming with the 25 per cent tax-free element. Effectively, a retiree could take out their pot 25 per cent at a time, completely tax-free. This increasing flexibility should ensure auto-enrolment’s popularity among those older workers who previously considered it too late for pension saving to achieve any meaningful impact.
The Department for Work and Pensions’ official statistics on workplace participation and saving trends show the number of eligible employees participating in a workplace pension declined to 11.7m in 2013 (58 per cent) from 12.3 per cent in 2003 (65 per cent).
Chart 1 looks at the total pension savings of eligible savers into workplace pensions per year. It can be seen that overall, savings have declined since 2005 when the figures began. This could be due to a higher unemployment rate and the recession meaning savers are putting away less money into their retirement pots.
The past year has seen an increase in employee contributions though, as the growing number of employees now automatically enrolled has bucked that downward trend.
