Any individual currently working should be planning for the day they retire. With the government changing its policies on pensions planning, advisers have to keep educating their clients on the benefits of saving for a rainy day. While individuals know opting into a workplace pensions scheme is useful, they are also worried that they may have to cut down on holidays, or that expensive wine they like and be left with lesser money to spend today.
But reports increasingly show more workers in the UK are now signing up for a workplace pensions scheme, especially since auto-enrolment started in October 2012. UK employers are now mandated by the government to automatically enrol all staff who meet the criteria into a workplace pension. The process started with the biggest businesses, with employees over 120,000, since they would have been more systemically prepared. Smaller businesses are being gradually signed up over a six-year period.
The next key milestone in the retirement space is the new rules on pensions freedom, announced last year by George Osborne, under which, from 6 April, employees can take their entire pension pot when they retire rather than drawing it down or buying an annuity. This is expected to change retirement funding. But some advisers suspect that with the upcoming elections looming, this is politically driven. Whatever the motivation, other countries such as Australia, New Zealand and the US are regularly cited as being far ahead of the UK in offering pension schemes.
Daren O’Brien, director of London-based Aurora Financial Services says, “In the UK, there seems to be a mixed message from the government with auto-enrolment and pensions freedom. The government is supposed to make things simpler but it becomes more and more difficult. With the elections in the background this seems political.”
However, Rick Eling, head of investment solutions at Sanlam says retirees will have more options after 6 April. “I think over the years we have been led to believe that an annuity is the only option and of course that’s not the case. There have always been drawdown options available but they have been seen as wealthy people’s options,” he says.
So where does the UK fit in the list of top pension providers around the world? According to the Melbourne Mercer Global Pensions Index 2014, the UK is at number nine with the top three spots bagged by Denmark, Australia and Netherlands.
Denmark has a well-established compulsory occupational pension scheme called ATP, founded in 1964, which employees aged between 16 and 67 pay into, while their employer pays two-thirds of the ATP contribution. The pension is paid out either as a lump sum if the balance is below a set amount or in the form of an annuity. ATP is behind Now: Pensions, set up to provide auto-enrolment to the UK.
Australia’s Superannuation Fund meanwhile, is almost 20 years old. Under this scheme, all staff aged between 18 and 70 who earn more than A$5,400 (£2,753) a year, receive a minimum contribution of 9.5 per cent of their annual salary from their employer. This is expected to rise to 12 per cent by 2019. “One key challenge that the increased coverage of defined contribution pensions could present is the potential increase in the number of people with multiple, small pension pots” says Patrick Nolan, former chief economist of the think-tank Reform.