Wake up pension reminder

For those who are being paid the state pension, this may not come as too much of a shock to be fair, although given the relative wealth our country has, to see the likes of Portugal and Spain – which effectively went bust during the financial crisis – and Korea way ahead of us in terms of the generosity of state pension payments really puts things in perspective.

UK workers will get an average of 38 per cent of the national average wage in state pension according to the OECD’s figures, a relative pittance when you consider that in Austria you would get 91.6 per cent, and in Turkey you would get 104.8 per cent – meaning you are actually better off retired in Turkey than you are in work. A rare win for getting older.

UK workers will get an average of 38 per cent of the national average wage in state pension

The OECD’s Pensions At A Glance 2015 research – not exactly aptly named in my opinion, given it runs to a hefty 378 pages in total – has some pretty interesting facts.

For example, the average number of years of contributions needed across the OECD countries before getting full minimum benefits was 26 years.

The UK state pension, by comparison, requires individuals to pay in for 35 years from next April before getting full minimum benefits, nine years more than the average across the world.

It is understandable that the way the state pension is paid is changing, particularly as the world population is generally getting older.

It is expected that the proportion of individuals aged 65 or above will rise from 8 per cent of the total world population now, to around 18 per cent by 2050, according to the report.

Taking the OECD countries alone, the figures are more concerning, with a rise from 16 per cent aged 65 or over now, to 27 per cent in 2050. So it is little wonder the state pension is becoming harder to fund, and that is a feature around the world, not just in the UK.

This has led to a number of changes designed to increase the financial sustainability of state pensions across the OECD.

Increasing the minimum retirement age has been a key means of achieving this, with the UK pension age set to rise to 68 between 2044 and 2046, but before that the men’s and women’s state pension age will level out at 65 in 2018.

The average across the OECD countries will be 65.5 years by the late 2050s, so again we are a little less generous here too.

However, the ‘triple lock’ offered by the UK government when it comes to the indexation of the state pension is unique in its link to prices, wages or 2.5 per cent, depending on which is higher. The OECD anticipates that it will be most likely that state pension payments in the UK will be linked to wages based on its long-term assumptions.

Of course, pension provision is not all about what is offered by the state, and most countries have also tried to increase the participation in pension schemes too. The UK is no different, having implemented auto-enrolment.

So far, more than 5.4m people have been auto-enrolled into a pension, according to the chancellor’s Spending Review, but the employers are being given a six-month reprieve as the increase in the amount of contributions required will be aligned to the tax years, rather than happening in October as originally planned.

The idea is to ease the administration – which it should do – but some, including the Association of British Insurers, described the move as “disappointing”.

It is possible to opt out of auto-enrolment, but the number of people doing so has been described as “low” in the Spending Review. It makes sense that this would be the case – choosing not to have your employer pay into a pension for you is equivalent to volunteering for a pay cut, and none of us would do that.

That said women – and to be fair some men - are still losing out on pension entitlements in many of the OECD countries when they take time out of their careers to care for their children.

The typical loss for interrupting a career for five years if a woman was earning an average wage in an OECD country is 4 per cent, but this rises to 11 per cent if she takes a 10-year career break.

The biggest declines are in Germany, Iceland, Israel, Italy, Mexico and Portugal for average wage earners, according to the OECD figures, yet in more than a third of countries, women can take a career break to care for children of as much as five years without any impact on their pension at all.

The difficulty for advisers is that while all of this evidence stacks up to make a compelling case to encourage people to save for their retirement, it is still very low on most people’s priority list given the calls on their money from mortgage payments, bringing up their children and so on.

Often, by the time they reach the point where they are starting to think about pension planning, they have already missed out on a lot of the benefit of early contributions they could otherwise have had.

Advisers play a big part in helping people to understand this, but it can be an uphill struggle to get individuals to take these messages on board, especially when the time they can get the most benefit out of their pension contributions is the very time when they are least likely to be interested in making them.

Alison Steed is a freelance journalist