Research suggests that, in 2007, people are finding saving more difficult than they did in 2004 and a growing proportion are willing to work beyond the normal retirement age. Occupational pensions are in steep decline, with just over one in four respondents to our survey agreeing that they have or will have a pension based on their earnings. Almost half of adults said that higher-rate tax relief on pension contributions is unfair and even more, nearly six in ten, agreed that property is the best pension investment.
The UK's low state pension, at £87.30 a week in 2007/2008, is augmented by means-tested credits that are complex to understand and claim. The Pensions Reform Group proposed a Universal Protected Pension (UPP) of between 25% and 30% of average earnings, but the Government did not adopt the plan, choosing Personal Accounts instead.
Stakeholder pensions failed in their target to significantly increase retirement saving among lower-income adults. In fact, almost a third of people who take out a personal pension stop paying within 3 years. Most individuals' pension funds are small: in the year ending 5th April 2005, only 2.2% of men and 0.5% of women with pension funds had £100,000 or more invested.
High earners continue to funnel money into pensions, encouraged by higher-rate tax relief. Self-invested personal pensions (SIPPs), widely available to people with funds of more than £100,000, are a strong sector, accounting for 27.9% of single-premium contributions in the first quarter of 2007. The pension changes introduced in April 2006 prompted many affluent contributors, especially those in their 30s and 40s — for whom tax relief was previously capped at low proportions of their income — to make larger contributions into their funds. At the same time, the imposition of a tax-privileged lifetime limit for individual pension funds spurred investment in physical assets, such as property, adding to property-price inflation.
Defined-benefit occupational pensions are in severe decline in the private sector, although company directors have protected pension plans for senior executives to a far greater extent than pensions for `ordinary' workers. The majority of the continuing contributors are in large schemes with more than 10,000 members. In the public sector, 5.1 million workers were in defined-benefit schemes as at 2006.
The Pension Protection Fund and the Financial Assistance Scheme are intended to improve public confidence in occupational pensions, but many issues remain, such as the lack of accuracy with which financial reporting standard (FRS) 17 values pensions fund assets and liabilities. The trend for private-equity firms to buy large companies and their pension schemes with borrowed money is a cause of concern for the future health of those pension funds.
A more liberal regime for maturing retirement funds began on 6th April 2006, from which date retirees no longer have to purchase an annuity by the age of 75, therefore clearing the way for different retirement products. Alternatives to annuities, such as income drawdown from pension funds, benefit from the slump in annuity rates, making them appear unattractive purchases. In real terms, annuity rates fell by more than 40% for both men and women between August 2000 and June 2007.
Canada Life, AXA and AEGON are among the most innovative providers of retirement income. All are controlled by companies outside the UK.
Pensions policy is subject to frequent changes, and this makes it difficult for individuals to plan ahead confidently. In any case, the majority of households would struggle to divert more money into pension saving. Only the top 20% of households by income have resources to inject into savings without making drastic economies in their spending. Debt is another relevant issue.
Pensions saving is set to become more difficult as pressures on personal incomes grow and barriers to longer participation in the workforce — including ill health, disability and lack of sufficient job vacancies — before becoming reliant on a pension are more apparent.
There is no single solution to the looming problems of retirement funding, although the majority of adults regard property as their best pension investment. However, the rising extent of pre-retirement equity withdrawal is cutting into the value of property as a pension resource.
Retirement planning requires several pillars and the complexities mean that customers should seek fee-paying independent financial advice. Personal Accounts are a sensible way ahead, but the intended freedom to opt out, without joining another type of pension plan, could be removed. Higher-rate tax relief on pension contributions is a subsidy to the already affluent and could be reduced to basic-rate relief, making an annual sum of around £4.3bn available to improve the state pension.
For quoted and mutual financial-services companies alike, mass-market multidecade pension plans are far less attractive than SIPPs for individuals able to afford maximum contributions or at- and post-retirement products: annuities exchanged for capital or fee-paying drawdown plans.
