According to Scottish Widows 2022 Retirement Report, 76% of the UK population say they need to make lifestyle adjustments to cope with current financial pressures. With wage stagnation and rising living costs set to worsen the UK’s retirement income crisis, there is danger of an increasing disconnect between the retirement that people want and the one they’re setting themselves up for.
This issue is exacerbated by most people simply having no idea what a comfortable retirement would cost them. Simple questions – What have I got in my pot? Is it enough? What can I do next? – are enough to flummox many savers.
These questions are the gateway to better retirement outcomes, and the industry should act as a guide. Of course, the industry has already done some work to remedy this by introducing the Pensions and Lifetime Savings Association’s Retirement Living Standards. But there is clearly more work to do.
By taking steps to improve their financial literacy, increasing their appreciation of workplace pensions as a retirement saving tool, and facilitating the consolidation of different pension pots that might otherwise end up lost, UK adults can move one step closer to improving their quality of life in retirement.
Finessing financial literacy
More than half (57%) of parents haven’t spoken to their children about long-term financial planning, according to Scottish Widows research. As a result, low financial literacy rates nationwide are on track to continue without urgent intervention.
Earlier this year, the prime minister announced plans for school pupils in England to study maths up until the age of 18. However, maths is meaningless unless we use it for real world-applications, including promoting financial education initiatives to help the younger generation nail the basics of financial literacy.
This involves learning how to manage bills or overdrafts, before introducing three key concepts: compound interest, pound cost averaging and the effect of inflation, which can all help people make better saving decisions in order to narrow the gap between retirement expectations and reality.
Educating the younger generation about these basics can also have major value for older adults when it comes to their retirement planning, as parents and guardians may even learn something they didn’t know about their own pension.
Scaling people’s workplace pension
Prioritising saving into a workplace pension is another way that adults can help narrow the disparity between retirement expectations and reality thanks to employer contributions, compound interest and tax relief.
Employers have a duty to highlight the benefits of retirees who save earlier in life. In this case, auto-enrolment (AE) has been a real game changer, helping to boost workplace pension participation from around 30% to 40% in 2012 to 90% today.
One way that adults can take ownership of their workplace pension is through downloading a pensions app or logging into their online banking. Having easy access to a pension via an app can give people regular visibility of what’s in their pension pot to help them make more informed decisions about their retirement planning.
Prioritising small pot consolidation
Another factor undermining people’s chances of a comfortable retirement is the ease with which people lose track of pension pots held with previous employers. Millions of working people, who may have as many as 11 different jobs in their career, still miss out on hard-earned retirement income as a result of this issue.
According to the Pensions Policy Institute, as much as £26.6bn is sitting in ‘lost’ defined contribution pension pots – money that could make a huge difference to workers’ retirement planning. Although AE has been overwhelmingly beneficial overall, it has contributed to this eye-watering total by giving many workers an extra pension pot with each new job. Following news that the delivery of the pensions dashboards programme is being delayed again, it is more important than ever that savers are supported to track down missing pots sooner rather than later.
Easy-to-use online means of consolidating pension pots are an extremely valuable tool for savers. For many people, combining them into one plan will make it simpler for them to plan their retirement.
But to make this more accessible, platforms that facilitate the recovery and consolidation of ‘lost’ small pots must be rolled out to savers immediately. Without it, workers are at further risk of losing out on improving their quality of life during retirement.
The bottom line
If we are serious about shoring up people’s quality of life, we should ensure they are preparing properly for the lifestyle they want in retirement.
To achieve this, industry and government must work together to impress upon people the importance of scaling financial education, growing their workplace pensions, and consolidating their small pots. Only then will the UK stop sleepwalking into the savings crisis that threatens to make retirees’ lives more difficult.
Robert Cochran is senior corporate pension specialist at Scottish Widows
