I am beginning to think that the financial planning sector is becoming the retirement planning sector, judging by recent debate and the direction of the sector, with fund managers increasingly jumping on the retirement bandwagon.
At the recent Personal Finance Society Festival of Financial Planning at the NEC, retirement planning dominated the debate. Session after session covered pensions and how to get it right. One session even featured two ex-pensions ministers. This sounds like a coup, but to be fair there are a lot of ex-pensions ministers about – and that’s part of the problem.
The turnover of pensions ministers is symptomatic of a country that can’t make up its mind about pensions, despite having a pensions mess to clear up. We have now entered an era in which people think that transferring their pension pot with little thought about the consequences is a really good idea. It might be wise for some, but for many it will result in disaster as they swap income certainty for cash now.
One key question is what is driving all this interest in pensions? Certainly, the pension freedoms, which unlocked the cage holding the golden goose, have a key part to play, but it may also be other, more obvious, demographic factors.
Getting older
We have an ageing population. More people are simply closer to retirement than ever and the money in pension pots is simply huge. It is no wonder that the vultures are beginning to circle.
A pivotal question for pension savers and financial advisers has always been the question of what is “enough” in retirement, and this affects all other aspects ofretirement planning. It is a question, sadly, that too few pension savers understand,but I believe that it will increasingly dominate the agenda.
There is one good reason: it simply is not good enough that millions of people have little idea how much they need to save for a comfortable retirement. How on earth can they save effectively and with a target in mind if they have no idea how much they need?
Many reports and surveys have recently picked up on this and on the unrealistic or, more fairly, daft assumptions many people have on pensions. We are a nation of gamblers, but far too many are gambling on a windfall to pay for their golden years.
The Budget will not sort thisout and there is no consensus on how to sit down with consumers and help them work out how much they need to save for a comfortable retirement. And that is simply shameful.
I was reminded of all this when reading through the findings of Aviva’s Real Retirement Report, which came out last week. The report surveyed 3,300 adults over the age of 50 – a bigger sample than most – and revealed the truly precarious nature of many over-50s retirement plans. It appears that millions of over-50s are relying on downsizing, an inheritance or a lottery win to fund their retirement. If this was not truly depressing, it would be funny.
The report found that peak earnings for older workers are thought to kick in aged 51. And although 34 per cent saved more during this period, only 12 per cent say they have or would pay more into a pension; just one in eight. More worryingly, almost a quarter (22 per cent) or 2.2 million workers aged 50 plus say they are yet to “take pension saving seriously”.
And herein lies the rub: more than two in five have not calculated how much money they will need in retirement (41 per cent) and how much should be saved to afford a comfortable retirement (42 per cent).
This equates to millions who have little idea how much they will need, which is surely the first question to ask in any retirement planning process.
Scratch your heads
I know that many financial advisers will scratch their heads in despair at this and say they could help, and I’m sure they could However, I believe that more fundamental help is needed.
Cashflow modelling can certainly assist here, but this needs to be much more widely available and more affordable. We need to go further, though. It should be a requirement for all people taking out a pension to undertake an assessment, test, cashflow model plan, questionnaire or whatever you like to help them assess what is “enough” to retire on. Annual statements after this should include a simple graph or graphic showing how close they are to being on track and whether they are paying enough in or need to pay more.
The ABI-led Pensions Dashboard project is a genuine opportunity to shift people’s understanding of their pension, but it must include the “enough” element, not simplylist how much is in each pension pot that people hold. The “gap” between what is enough and what people are actually saving is the critical figure.
Kevin O’Donnell is a financial writer and journalist
