22nd May 2012
Why don't we save for retirement?
"UK pension savings have hit an all time low with only 46 percent of people saving enough for their retirement – five percentage points down on last year and a fall of eight percentage points from 2009," – so starts the press release issued today to launch the 2012 Scottish Widows Pensions Report 2012 .
Same old same old
Readers with a strong Groundhog Day aversion should stop here.
For, give or take a percentage point or two, this is the same failure message as that in the previous seven Scottish Widows Pensions Reports.
Banging one's head repeatedly against the same brick wall to no visible purpose borders on the masochistic or the absurd.
Who's to blame?
But it would be unfair to single out Scottish Widows for its report.
Rival providers – Aviva, Prudential, Legal & General to name-check just a few – have also been releasing similar "me-too" texts for the past decade or two. You can choose from the £800bn pension shock or the ostrich generation or or the Irish version of Aviva's Mind the Pension Gap amongst many others.
Why no change of direction?
So why do pension provider marketing departments continue to put out these releases when it must be self-evident that they fail to achieve the desired effect – to get more investors saving into their funds?
"Surveys and reports of this sort have gone out with a regularity over the past 15 and more years. They appear to have no impact," says pensions expert Laith Khalaf at IFA Hargreaves Lansdown. "The only possibility is that without these continual warnings, then even fewer might save for a pension. These reports get a media circulation. Providers don't seem to have any other ideas than these releases which appear to be the only tool in the box. It's not working to any great degree."
Scottish Widows does at least concede its target audience might have "priorities above pensions" including mortgages, rent, general cost of living as well as – cited by one in six – holidays and travelling.
Option One – don't go on holiday!
That leisure priority particularly outrages the Widows. "Those putting holidays and travelling before saving for their pension need to urgently rethink their priorities to have any chance of enjoying a comfortable retirement," the firm hectors with the odd split infinitive.
Personal pensions have the great advantage of tax relief on almost all contributions coupled with tax freedom for the fund.
That sounds a winner but there are substantial drawbacks besides affordability issues, now worsened by increased student debt. These include investment risk – pension buyers mostly do not understand the choice and those that do worry they will get it wrong; annuity risk – the mechanism that turns a pension pot into a income may be very different from the original estimate or even a figure issued six months earlier; and costs which can give a guaranteed reward to providers almost as large as that earned by savers, especially in the current low return environment.
Option two – Don't save anything but change the money system
It might be time to change direction – work out other routes to retirement income that do not involve high costs, and even higher investment and annuity risks inherent in pension plans.
These involve blue sky thinking – rarely a life office strength.
A blue sky alternative –
Money ties retirement to the financial system. But what if people who want out of working also want to exit Big Finance?
Bernard Lietaer refutes the view that money, as a means of exchange, is neutral. It is not – its role is culture specific. The author of The Future of Money, he is an international expert in the design and implementation of currency systems.
Lietaer cites the fureai kippu the alternative elderly care currency in Japan.
Ask the people system which they prefer
He says: "A survey among the elderly asked them what they prefer: the services provided by people who are paid in yen, the national currency; or the services provided by the people paid in fureai kippu. The universal answer: those paid in fureai kippu, because the relationships are different. This is one example of evidence that currency is not neutral."
This dates back some 15 years in Japan but more recently spread to China.
Benefits of the alternative system
It helps to re-integrate retired people into wider society. Instead of being seen as a burden – a tax charge or someone gobbling up the efforts of others – the scheme puts the needs of older people before those of the financial system.
Time for the UK's social credit-bank?
The idea is that people offer skills – from architecture to zoo-keeping via jam-making and car crash repairs – to a central bank. These create credits to use in retirement; the debit side is when someone in the system calls on these.
Someone credited with 100 hours of information technology skills could call on 100 hours of other forms of work such as gardening or plumbing.
How the internet can help
Moving forward and using social media in particular and the internet in general, the IT person could bank that time ahead of retirement so she or he could use spare time or periods of unemployment to store up hours which could be called upon later.
This could enable many to ride out periods of low or no work – one of the big drawbacks of the present pension system is that it is impossible to fund a pension other than out of surplus earnings.
The end of retirement?
Taking retirement out of the present money system also sidesteps tax issues and the complexity of pensions legislation.
Option three – create a good state pension
Auto-enrolment which starts in October with large firms and will be rolled out across all employers by 2017 assumes people will join a pension plan because it will both be the default option and they will receive an employer contribution. Employees will see this as a deduction (up to 5% on present plans) from their pay packets.
But the money will still go into a pension fund with all its investment and other risks. It won't mend the pension gap – Khalaf estimates that someone aged 35 needs to save 15% of salary (including any employer payment) to achieve a half salary annuity at 65. The maximum under auto-enrolment is 8%.
Many will see this as "another tax" to pay along with income tax, national insurance and their student loan repayments.
From there is it a simple step to re-arranging the deduction burden so some goes to a state pension scheme with its plus points of no investment risk and very low administration charges.
Khalaf says: "People don't like taxes, they lose control of their money and governments can change systems."
Equally, people don't like losing control of their money once it is locked into a personal pension while the likelihood of anyone getting the pension in their illustration 30 or 40 years down th
e line is remote.
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