Mat Zimmerman, Market Development Manager, Scottish Widows
19 Jan 2017
Scottish Widows’ Workplace Pensions Report 2016 revealed that more than half of 18-29 year-olds expect cash savings, including cash-ISAs to help them with a reasonable standard of living in retirement. But is that realistic? Many younger people could be missing out if they’re not making the most of workplace pensions.
People expect to call on a range of sources in retirement, but there’s a clear generational split in what people expect to rely on. Property (34%) and cash savings (51%) ranked much higher for those aged 18-29 than for older groups. Only a quarter of those aged 30-64 expect to be able to rely on property and just over a third (36%) on cash savings.
Instead, older workers are more likely to have higher expectations for the state pension and workplace pensions. That aspect isn’t particularly surprising; older workers will be less impacted by the changes to the state pension age and have had better opportunity to take advantage of generous defined benefit schemes, many of which have since closed.
But in spite of this, for long-term saving, the confidence younger people put in cash savings could be misplaced. Whatever your definition of a comfortable retirement, most people will need total assets or savings running into hundreds of thousands of pounds. The average amount people say they save for retirement, outside of pensions or property is just £150 per month across all ages, and less than £100 for those under 30. Importantly, this money isn’t necessarily locked away for later life and can be accessed for short-term needs.
With a workplace pension, employer contributions, favourable tax treatment and investment growth all work together to give workers the best chance to save the considerable sum required. Cash savings have alternative merits, including easy access, but that doesn’t lend itself to saving for the long-term, where holding back any spending temptation is advantageous.
Recent Government changes have made ISAs, including cash-ISAs more attractive. Along with the introduction of automatic enrolment and the upcoming introduction of the lifetime ISA (LISA), this has formed a real push towards a savings culture in the UK.
But the role for both Government and the industry is to help people understand how different products meet different needs. ISAs are well suited to short or medium-term goals, where easy access is important and the tax treatment can add some extra value. But when it comes to saving for retirement, there are features of workplace pensions that can’t be replicated in other products.
While the LISA will share some similar benefits with workplace pensions (although significantly, not the employer contributions), the FCA recently flagged a risk that customers may not be invested appropriately – especially if savings which are initially earmarked for a property purchase are then to be used for retirement. Without an employer/adviser-chosen default investment strategy, customers will need some understanding of which asset classes are most appropriate for long-term saving.
All of these challenges point to the need for education and, where appropriate, tailored guidance or advice. Employers will be able to support this by making educational material accessible in the workplace. This will be particularly beneficial when the content goes beyond the workplace pension and explains how various products work together to support short and long-term financial wellbeing. Pension providers and advisers should be expected to support this.