Additional declines in personal saving are
inevitable in the UK and will increase the potential for a
catastrophic income and retirement crisis in the country; this
stark warning comes from the Prudential Retirement Income Panel, a
group of independent financial advisers (IFA), industry product
providers and retirement experts convened by UK insurer Prudential
to assess problems in the retirement arena and potential
solutions.
Summing up the panel’s sentiments, Tom McPhail,
head of pensions research at IFA company Hargreaves Lansdown, said:
“I don’t believe the current retirement savings situation is as bad
as it is going to get; I think we are storing up problems for the
future.” He warned that pensioners’ incomes are going to be “a big
problem” in ten years’ time.
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Three key factors are fuelling the looming retirement crisis facing
millions of people, noted the panel:
• The decline in occupational pensions, which pay up to two-thirds
of final salary;
• The baby-boomer generation (those aged 50 to 65) cashing in on
their housing equity to pay off debts and help children get on the
housing ladder, thus eroding potential retirement income assets;
and
• Younger generations being saddled with student debts and
struggling to become first-time property owners, leading many to
avoid making any retirement provision.
Need for advice
The panel called for the government and the financial services
industry to work more closely together to find urgent solutions. As
part of a move in this direction, it put forward a number of
recommendations that it believes would help alleviate the looming
crisis. Among the most important of these is the provision of
suitable financial advice.
“There’s a great deal of education that needs to be done when it
comes to retirement income planning, “said Gary Shaughnessey, panel
host and MD of Prudential Life and Pensions. “The average male aged
60 retiring today will live to 85, but their expectation for how
long they are going to live is 75. The average pension pot at
retirement is £25,000 [$50,000] – that is stunningly low.”
The panel also called for more access to financial education and
more widespread availability of financial advice to all income
groups. A significant problem in the advisory market is a lack of
attention paid to lower income earners, warned the panel. “People
are not given enough skills to deal with money,” said Paul Fife, MD
of IFA company Equus. “Advice is being forced upmarket and at the
bottom end of the market there is no advice.”
To improve access to advice, the panel recommended that the
government and retirement industry look at examples of best
practice from other countries. The Australian government, for
example, backs helplines that provide free advice on pension and
retirement planning.
Products must be simplified
In addition to a need for more advice and education, the panel
highlighted the importance of making products easily
understandable. The retirement industry, observed the panel, is too
reliant on language that people do not understand, and reducing
financial jargon and simplifying product information to open the
financial and investment market to a wider number of consumers is
critical. Commenting on the complex nature of retirement product
advice, Stuart Bayliss, MD of IFA company Annuity Direct, said:
“Recommendations produced by IFAs have to be at least 12 pages
long; nobody reads that, even with the best will in the
world.”
The panel also called for greater use of asset wealth wrappers, a
move it believes would encourage more interest by consumers in
their financial well-being. Asset wealth wrappers, explained the
panel, enable consumers to readily see the wealth built up across
all their different asset classes, making them “more engaged with
their financial planning”. The panel also stressed that because
asset wealth wrappers demonstrate consumers’ overall wealth more
clearly, advisers would see the consumers as a more attractive
proposition and be more willing and able to provide holistic
financial advice.
Among the most urgent areas in which consumers are in need of
advice, believes the panel, is in the countering of inflation’s
erosion of their wealth. “Inflation across the economy is around
2.5 percent but between 4 and 6 percent for retired people,” said
Shaughnessey. “There is a complete lack of awareness of the impact
that inflation will have on people’s retirement income generally.
This is a huge issue that we talk about a lot but it still has not
reached the consumer consciousness to the extent it should
have.”
