Mind the Pension Gap

MIND THE PENSION GAP

An exploration of attitudes towards pensions and retirement planning in the UK

AUTUMN 2020

When it comes to planning for retirement, our ‘Mind the Pension Gap’ research reveals the opinions of 2,000 employees about the divide between what they hope to achieve in later life and what, realistically, they’ll be able to afford.

When we approached this work, we were expecting to find that people were unprepared for retirement. What is surprising is the scale of that problem. People are unprepared not only in their actions but in their attitudes too.

Our research reveals:

  • 61% think retirement is an outdated concept
  • 57% of people have no idea how much income they will have in retirement
  • 33% plan to fund their retirement through part-time work
  • 23% are relying on inheritance

In this research, find out:

  • The cost of retirement, at different standards of living
  • Common retirement plans and worries
  • Attitudes to retirement, and how its funded

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Introduction

As financial advisers, Wren Sterling works with people of all ages from all over the UK with varying financial situations. Prior to conducting this research, we believed that steps taken in recent years, such as automatic enrolment and pension freedom, had widened participation and awareness in retirement planning. Yet, our research makes it clear that the education element of such initiatives has not quite landed.

Some people acknowledge that they have a financial problem but they’re not engaging an expert to help them. For example, if every young person could see their own journey mapped out and the projected benefit of tax relief on their pension savings every month for the rest of their lives, would it alter attitudes and behaviour? It could be as simple as the UK being bad at budgeting, but you would like to think that a young person might be more interested in a pension than a cash savings plan to build for retirement. At the moment though, engaging people to show them these projections is a tough ask.

Since we conducted this research the world was locked down due to coronavirus.
We expect this to make saving for retirement harder as unemployment bites, but making people aware of the resilience of equity markets is a message that needs to be trumpeted loudly.
For example, after the financial crisis in 2008, we experienced a ‘bear’ market (a price decrease of more than 20%) but that only lasted 16 months, so a blip for any long-term pension saver. Similarly, the bursting of the dotcom bubble in 2000 caused a bear market that lasted 29 months, but it returned very strongly afterwards.
We don’t want people to view investing as too risky for their pension as it is necessary for growth, yet that is a concern for the people we surveyed.

Similarly, ceasing pension contributions to pay for the here and now or withdrawing pension funds if someone is over 55 are concerns for financial advisers.

Young people can feel as though they have to choose between doing the right thing for their future financial wellbeing (generally defined as saving into a pension and getting on the housing ladder) and enjoying life. However, unless they are in line for a deposit from the bank of mum and dad (or grandma and grandpa) or an inheritance windfall, the onus is on the individual to make these tough choices.

Our research shows that many younger people we surveyed are displaying ostrich tendencies, which is forgivable given the scale of the task, but undoubtedly storing up problems for later in life, which could be made worse by an ageing population and a crisis in social care.

In 2019, the Pensions and Lifetime Savings Association (PLSA) set out ‘retirement standards’ to reveal how much money savers need to maintain their lifestyle in retirement.

The trade association said that it hopes the standards will be understood in the same way being told eat ‘five a day’ encouraged fruit and vegetable consumption.

The PLSA’s research revealed the minimum a single person needs a year is £10,200 and for a couple that increases to £15,700. But for those looking for a more comfortable retirement, individuals need £33,000 a year and couples need £47,500.

Calculations are based on FTSE All Share (GBP Total Return). A bear market is defined as a price decrease of more than 20%. A bull market is defined as a price increase of more than 20%. The plotted areas depict the losses/gains ranging from the minimum following a 20% loss to the respective maximum following a 20% appreciation in the underlying index. Time period: 31 January 1900 to 31 December 2018. Calculations based on monthly data. Logarithmic scale on y axis.
Source: Global Financial Data.

The cost of retirement

When we approached this work, we were expecting to find that people were unprepared for retirement. What is surprising is the scale of that problem. People are unprepared not only in their actions but in their attitudes too.

Savings rates are rightly called out as too low and high-risk investments are not suitable for everyone, but there is fertile ground in the middle. Steering people towards  investments with the right level of risk to achieve their financial goals and finding a way to communicate the tax benefits of pension savings, in a way that resonates, look like the next big challenge for the Government, employers and advisers.

Food for thought

The findings from the Pensions and Lifetime Savings Association certainly provide food for thought for employees working towards retirement. But our research reveals a different reality.
Our research shows that people are a long way off meeting the behaviour required to achieve these lifestyles in retirement.
It shows the majority of people in the UK are unprepared and worried about their financial futures and a growing number fear they are unlikely to ever be able to retire, much less with a level of income that will provide a comfortable retirement.

About the research
OnePoll carried out the research on behalf of Wren Sterling in February 2020 among a panel of 2,000 UK employees aged 18 to 65+.

Executive Summary

We discovered a nation of retirement worriers and deniers with plans destined never to materialise.

We found pension investments are likely to be misaligned to the risk appetite required for growth because of a hands-off approach to saving, while people are missing out because they don’t understand the tax benefits of pensions. And we also discovered that the vast majority of people do not have a retirement vision or strategy, which could be changed if they would interact with a financial adviser.

Retirement plans and worries

  • 61% think retirement is an outdated concept
  • 57% of people have no idea how much income they will have in retirement
  • 33% plan to fund their retirement through part-time work
  • 23% are relying on inheritance

Pension opportunities – missed

  • Only 16% of people fully understand the tax benefits of pensions savings
  • 57% have never reviewed where their pension savings are invested
  • 33% of people would choose a low risk investment with a low potential return for their pension savings and miss out on the higher potential returns of a more balanced investment approach
  • Only 36% of people in the UK have sought advice from a professional financial adviser
  • 30% of people think professional financial advice is too expensive and 16% feel it is only for the wealthy

Pension regrets

  • 44% of Brits would tell their younger self to start saving into a pension sooner, rising to 50% of over 45’s
  • 18% of people would advise their younger self to take professional financial advice

Retirement dreams are just that

Brits have a retirement bucket list dominated by travel, including the Northern Lights and an African safari, but only 11% think it’s very likely they’ll achieve their bucket list.

57% of people have no idea how much income they will have in retirement

Pension opportunities – missed

  • Only 16% of people fully understand the tax benefits of pensions savings
  • 57% have never reviewed where their pension savings are invested
  • 33% of people would choose a low risk investment with a low potential return for their pension savings and miss out on the higher potential returns of a more balanced investment approach
  • Only 36% of people in the UK have sought advice from a professional financial adviser
  • 30% of people think professional financial advice is too expensive and 16% feel it is only for the wealthy

Pension regrets

  • 44% of Brits would tell their younger self to start saving into a pension sooner, rising to 50% of over 45’s
  • 18% of people would advise their younger self to take professional financial advice

Retirement dreams are just that

Brits have a retirement bucket list dominated by travel, including the Northern Lights and an African safari, but only 11% think it’s very likely they’ll achieve their bucket list.

Only 36% of people in the UK have sought advice from a professional financial adviser

Planning for retirement

Savvy savers or spenders?
We asked 2,000 employed people in the UK how prepared they felt for retirement, more than half (57%) said they have no idea how much income they will have when they finish working. And the figures don’t improve with age.

Worryingly, 43% of employees closest to retirement, aged between 55 and 64 years, didn’t know. Neither did 63% of people aged 45 to 54 and 57% of those aged 35 to 44.

The results were also starkly different across the regions of the UK with 68% of people in East Anglia not knowing what their financial situation would be in later life. In contrast, 60% of employees in London felt confident they did know what their retirement income will be.

57% of people have no idea how much income they will have in retirement

The UK’s Pension Blind Spots
Top 5 Pension Blind Spots in the UK
Percentage of employees by region who don’t know how much their retirement income will be:
1. East Anglia – 68%
2. West Midlands – 64%
3. Wales – 64%
4. Yorkshire and Humber – 62%
5. North East – 59%

Top 5 Savvy Saver locations in the UK
Percentage of employees by region who are confident of what their retirement income will be:
1. London – 60%
2. Northern Ireland – 50%
3. East Midlands – 49%
4. North West – 42%
4. South West – 42%
5. Scotland – 41%

Income in retirement

Women were more concerned about their retirement income than men, 76% against 65% respectively.
And Londoners, despite being the most confident about the income they would receive in retirement, were found to be the most worried, with 76% anxious about their financial futures.

But it’s not sleepless nights across the whole of the UK. People in Yorkshire and the Humber and the South East of England are the least concerned, despite the Northern region appearing at number 4 in the top 5 places where people are unsure of their retirement finances.
This could be indicative of lower living costs, lower aspirations in retirement or just a belief that things will take care of themselves.

Almost a quarter of British people are relying on an inheritance to fund their retirement.

How is the UK planning for retirement?
Our research explored how people plan to fund their retirement – with some surprising results. Overall, pensions (67%) and cash savings (54%) were the most popular options.
However, we also found that 33% have no intention of fully retiring and instead plan to fund their later life with part-time work.
And some plan to never retire at all.

Just under a quarter, 21%, plan to continue to work full-time and a further 12% plan on being reliant on self-employment or contract work to make their retirement ends meet. Another surprising result from the research was that 23% of people are relying on inheritance for their financial stability in retirement. Which, due to people living longer is a risky financial plan indeed. Taxation is also subject to change and inheritance tax has seen more than its fair share of changes over the years. A further 7% admit that they have never considered how they’ll be able to afford retirement.

Cash savings are often used. It is often used in conjunction with a pension to fund retirement. However, the 18-24 age group had the highest percentage of people saying they would fund it with cash savings and the lowest with a pension, suggesting they don’t understand the tax benefits of saving into a pension which isn’t surprising when only 11 per cent of that age group say they completely understand the tax benefits of saving into a pension for retirement.

Overall, it’s clear more needs to be done to educate people about the tax efficiency of pension savings when compared to cash and other investments as the majority of all age groups said they did not have a complete understanding.

Attitudes to retirement

Is retirement a thing of the past?
61% of our panel of 2,000 people agreed with the statement that retirement is now an outdated concept.

Those most disillusioned with the concept of retirement were the youngest members of our panel aged between 18 and 24 years old. 78% of mostly Generation Z employees agree or strongly agree that retirement is no longer a certainty for them.

67% of women also agree that the concept of retirement is out of reach and outdated as do 56% of men.

66% of our research panel planning to fund their retirement with employment, either full or part-time, self-employed or contract work, it’s clear that the UK’s attitude to retirement is changing.

The UKs over 70s workforce

According to figures from the Office of National Statistics (ONS) the number of people over the age of 70 who are still working has more than doubled in the last decade to almost half a million.
In the first quarter of 2019 ONS data showed that 497,946 employees were over 70 – an increase of 135% since 2009.

over 70s workforce

Taking retirement responsibility

Who should be responsible for providing an income for your retirement? According to 53% of our panel the responsibility lays firmly at their door. But a further 22% feel the Government should be responsible for providing an income for them in later life.

This was a view echoed by 30% of employees who live in the North East and 26% in the West Midlands.

Only 14% of employees believe that their employer should be responsible for their retirement income

Comments from our research panel

If you’ve worked all your life the responsibility to fund retirement should be between the individual and the state.

We pay National Insurance so the responsibility should be the Government’s.

Responsibility should be split between the individual, the employer and the Government.

Worryingly, 10% have no idea who should be responsible for funding their retirement

Risk vs Reward

We found that the UK’s appetite for risk, when it came to making investments for their retirement, was low.
We asked 2,000 UK employees…

Q. You have £100,000 to invest into a pension for your retirement and have to decide what level of risk to take with your money. The higher the level of risk the greater the potential return but also the greater the likelihood you will see the value of your pension pot fall during that time.

The following options show the best and worst case scenarios over the next three years. Could you sleep at night if your pension pot went down by £9,000 in three years if that option also offered the potential for it to grow by £25,000, or would you prefer to take less risk with your money?

Which one of these hypothetical best and worst case scenarios most closely reflects how comfortable you are with taking a risk with your pension?

scenario

A third of our panel selected scenario one, which presented the lowest risk, but also the lowest possible return. Just under a quarter (24%) would be willing to take slightly more of a risk with scenario two.
But only 9% said they would opt for scenario four which presented the highest risk in terms of worst-case scenario, but greatest investment return in a best-case scenario.
One in five respondents did not know, suggesting they have little or no concept of risk and reward.

In an era of low interest rates on savings, hitting retirement income goals requires some risk to be taken with pension investments to bridge the gap. Without a financial adviser to educate people on why this is important, people saving for retirement run the risk of their money not working hard enough for them in the markets prior to retirement.

Regional risk taking:
People in Yorkshire and the Humber were revealed as the biggest risk takers, with 29% selecting either scenario three or four.
While those in Northern Ireland were the most conservative with 50% opting for Scenario one.

When considering investments, including pensions, you need to be aware that the value of your investment could go down as well as up and your capital is at risk.

Financial Advice

Regrets…Brits have a few
The UK’s biggest financial regret across all age groups was that they wish they had saved more when they were younger. 40% of our panel said if they could turn the clock back that’s exactly what they would do.
Around a quarter (24%) wished that they had got onto the property ladder sooner, with those aged 35 to 44 the most disappointed that they hadn’t bought a home sooner (33%). 21% regret spending as much on nights out and 17% wish they hadn’t wasted money on buying new clothes, while 20% of us wish we had never used a credit card.
10% of students would have thought twice about going to university.

But our research also revealed that financial regrets diminish with age. Only 12 per cent of over 45s regret spending as much on nights out, while 10 per cent wish they hadn’t bought as many clothes and 15 per cent regretted using a credit card.
It’s therefore not surprising, that if they could go back in time, 44% would encourage their younger self to start saving for a pension sooner, increasing to 50 per cent in the over 45s.

Comments from our research panel

Buy property as soon as you can.

Put in a little more than you think you can afford. I made the mistake of being afraid to commit to a realistic amount.

Don’t go and get a credit card. Save up for things you want instead.

13% of people regret not taking professional financial advice with a further

Asking the professionals
13% of people regret not taking professional financial advice with a further 18% wishing they could give that piece of advice to their younger self. Despite this, only 36% had sought the professional guidance of a financial adviser. Women were the least inclined to seek professional financial advice with 68% admitting to never using the services of an expert.
The South West region (75%), East Anglia (73%) and East Midlands (69%) topped the locations with the highest number of people who had never used a financial adviser.

do you have a financial adviser

Retirement dreams vs Retirement reality

When most people dream of retirement they consider the activities they will be able to do with all the free time on their hands – including fulfilling their bucket list.
But, with the majority of people unaware of what their retirement income will be, how many of their retirement dreams will ever be able to become reality?

See the Northern Lights
35%
See the Northern Lights 35%
Go on an African Safari
22%
Go on an African Safari 22%
Take a road trip e.g.
Route 66
21%
Take a road trip e.g. Route 66 21%
Holiday in the Maldives
20%
Holiday in the Maldives 20%
Visit Niagara Falls
19%
Visit Niagara Falls 19%
Tour the Pyramids
18%
Tour the Pyramids 18%
Walk the Great
Wall of China
17%
Walk the Great Wall of China 17%
Visit the Galapagos Islands
16%
Visit the Galapagos Islands 16%
Visit the 7 Wonders
of the World
15%
Visit the 7 Wonders of the World 15%
A row of houses representing inheritance tax IHT
Build a dream home 13%

Travel dominated the most popular bucket list items people in the UK want to be able to achieve in retirement. However, keeping the grey matter working was important too with 12% wanting to learn a new language, 9% hoping to acquire the skill to play an instrument and 8% with plans to write a novel. And remaining physically active was also important – as 23% said they were concerned that retirement will impact their physical and mental wellbeing.
8% want to climb a mountain
4% would like to run a marathon

A largely unknown aspect of a financial adviser’s work is to help plan towards life goals. Advisers recognise that people have emotional goals as well as financial and can help people work towards bucket list items without the guilt of spending the money or the uncertainty of wondering whether they could really afford it.

41% of people are looking forward to retirement but a quarter are concerned how they will spend their free time

It’s one thing adding items to a bucket list, but as the research reveals it’s quite another thing to be able to afford it once you are retired.
Around a quarter (24%) don’t think it’s likely they will be able to tick off the items on their bucket list. With a further 17% believing it’s a dream that will never become a reality.
And that’s not surprising when you consider just five items from our Top Ten Bucket List Retirement Dreams would cost a couple more than £10,000 in retirement savings.
The following illustration shows an average cost based on 2 people, including flights, transfer, dinner and accommodation.

Table source: Average costs based on Trip Adviser’s TripIndex Experiences of a Lifetime: 2016

18% regret not spending more on experiences when they were younger

Living for the moment?

Less than a quarter (24%) of 25 to 35 year olds think you should wait until retirement to start your bucket list. This point of view may reflect young people’s gloomy attitude towards ever being able to retire. Depending on your point of view this might be informed by a culture dominated by experiences and living in the moment, or the sheer scale of affording a house, pension and a life at the same time.

bucket list
64% of our panel believe that you shouldn’t wait until retirement to achieve your bucket list dreams

Conclusion

Living longer – retiring never?
Like most developed countries across the world, the population in the UK is not only living longer but also spending more time in employment.

It seems the days of being presented with a carriage clock and heading to retirement in your 60s is now very much a thing of the past for most people. Not least because attitudes have changed dramatically around the value older employees bring UK business, but also because, as we’ve found in our research, the majority of people don’t have firm plans in place for funding their retirement.

Despite most of our panel of 2,000 UK employees aged 18 to 65 plus favouring investing in pensions and cash savings for their financial future, few people know how much income they’ll have in retirement.

And almost a quarter say they are relying on inheritance to see them through retirement.

It might be too early to say what the long term effects of the coronavirus pandemic will be on the public purse, but it’s reasonable to assume that state pension payments will not be sustained at the current level, which increases the onus on individuals to look after their own retirement. That’s a tough message for the Government to take out to the population so it will fall on advisers and influential stakeholders (such as employers) to get the message out.

Retirement woes keeping the UK awake at night

This lack of certainty has resulted in 70% of people being concerned that they won’t have enough income to enjoy
their retirement. A further 10% don’t believe they will ever be in a position to afford retirement.

Risk vs reward

A feeling of uncertainty ran throughout our research highlighting feelings of uncertainty in the respondents.

When it comes to taking a risk with retirement investments people wanted more certainty, even if that meant sacrificing a potentially higher return on their investment. However, 9% of people claim one of the pieces of financial advice they would give their younger self would be to take more risks for a higher return on their investment.

Dreaming big

Despite their concerns about retirement, our panel had big dreams for how they would like to spend their later life. Travelling the world, building their dream home and learning new skills featured on the most popular items in our retirement bucket list. But the gap between dream and reality was clear, as 24% don’t think they will be able to afford their bucket list.

The solution: Financial advice has never been so vital to allowing people to achieve their retirement dreams

Our research reveals that most people lack confidence in their retirement plans. This, combined with a gap in knowledge about things such as the tax benefits of saving in a pension, is leaving the majority of UK employees resigned to working longer and rejecting some of their retirement dreams.
But this can all be remedied with professional financial advice. If more people felt it was more accessible.
The truth is planning finances for retirement is complex and there is no one size fits all approach. Everyone has different circumstances, values and ambitions. And because of this, a lot of people simply don’t have the confidence to know the right approach for them.
Only by engaging with their pension and financial advisers will people begin to realise what’s possible and build plans to achieve their goals.