The extent to which we, as a nation, are underfunding our retirement is difficult to gauge, but few financial professionals doubt that we are. With the exception of those from the golden generation who are at, or near, retirement and public sector workers who have amassed significant defined-benefit pensions, most people have little idea of what sort of pension they are likely to get.
Two recent surveys highlighted the predicament. One by BlackRock, of 25 to 34-year-olds, found that 31 per cent expect to retire on an annual income of £30,000 or more – a figure often cited by professionals as a reasonable ambition. But the same study also found that only 12 per cent were actively saving into a pension; instead 32 per cent were saving to buy a property, 27 per cent were saving to go on holiday and 10 per cent were eyeing up a new car.
A survey of 2,000 savers by Friends Life lent further weight: only 13 per cent were willing to contribute 10 per cent or more of their salary to a pension pot, while 61 per cent would opt out of a pension entirely rather than contribute 5 per cent of their salary.
Statistics like this can of course be misleading, but they do provide evidence of the widespread underfunding from the current workforce that drove political parties to launch pensions auto-enrolment in October. The cost of pensions, in real terms and in political credos, is a subject that has received much debate in Westminster in recent years, particularly surrounding reforms to generous public sector pensions.
And the ambition of auto-enrolment was to ensure that those at most risk of falling into poverty after retirement – and most likely to need state support – had at least some form of funded pension to top up standard state benefits.
But the problem is just as relevant for professional middle-income earners who are more likely to have, or seek, a relationship with an IFA. As the surveys illustrate, the vast majority are not saving enough into a pension to deliver the sort of retirement income they expect.
As we move into a post-RDR world where advisers are expected to give broad advice on their clients’ overall wealth rather than sell products, IFAs will need to question whether their clients can really afford any form of investing other than a pension.
This may sound a daft question given the array of tax-beneficial savings products available – ISAs, bonds and investment portfolios – but the problem with all forms of savings other than a pension is that the money is typically used to fund immediate spending rather than locked away to provide income after retirement. If clients are underfunding their pensions, how can they afford any other form of saving or investing?
To assess clients’ likely financial position upon retirement, IFAs must of course consider all information. Take the example of 35-year-old John, a hypothetical professional with the expectation of a £30,000 income in retirement, currently earning £60,000 a year. John is hardly part of the demographic targeted by auto-enrolment, but a cause for concern nonetheless. With 30 years to go until his retirement date of 65, is he on track?