It’s time to embrace deferred gratification and to start saving
WOW. We knew that the pension crisis was bad – but in reality it’s even worse than that. The situation is catastrophic: the average pension pot is just £36,800, and many people have nothing at all. On current paltry annuity rates, that is just enough to generate a retirement income of a miserable £1,340 a year.
An average earner on £27,000 would need a pot of £240,000 to earn a semi-decent income, a target that is so out of reach as to feel downright utopian. Even if someone on an average income saves eight per cent of their income every year, and does so for 40 years, they would still just be able to put aside around 55 per cent of what they need to generate the official target retirement income. That figure drops to 40 per cent if that individual takes their tax free lump sum when they retire.
As for higher earners – such as the average reader of this newspaper – a pot of at least £1m would be needed to maintain the sorts of living standards they have got used to. £1m? At least? It’s completely unrealistic for nearly everybody – including most in the top one per cent – which is why the solution is either a complete cultural revolution with drastic cuts to current consumption and a huge increase in saving, and decades of prudence, or the complete end of retirement and everybody having to work until they drop. Given that the latter is not actually practical – at some stage, people have to stop working – and given that lots of other kinds of increased savings will also be needed – to buy and pay for a home, to finance care in old age, and for much else besides, it is clear that the first solution is the only possible way forward. We all need to start saving much more aggressively.
A Policy Exchange report today highlights a few ways this could happen. It suggests extending the new Nest pension auto-enrolment scheme and making it compulsory – except for those who can show that they have enough saved in other schemes. At present, just one in ten opt out; but as the scheme is extended the worry is that far more may do so. The report also suggests increasing the target savings rate to 12 per cent, up from eight per cent, over the next five years.
The report also suggests that the government should issue annuity type government bonds, which retirees could buy instead of the normal annuities; while an intriguing idea, I much prefer the second part of the proposal, which is to allow up to 50 per cent of the minimum income requirement above the state pension to come from an income drawdown from an approved equity or mixed asset fund. The present compulsory reliance on annuities is misplaced.
The research follows a similar call from the Institute of Economic Affairs, which also recommends encouraging people to put far more of their income aside and to adopt an Australian-style compulsory savings system. A society where everybody saved 12 per cent – and maybe even more – of their income all of their lives, and in which the money was carefully stashed away in privately-owned, named individual savings and investment accounts, would be very different to today’s. It would of course allow people to enjoy a proper retirement. It would provide a huge pool of capital to finance business. But almost as importantly, it would change our values: we would have less money to spend on immediate consumption, and would be forced to embrace much greater amounts of delayed gratification. It would rescue the ownership society and the idea of mass capitalism: everybody would own a stake in the economy and the corporate world, and the public would become much more supportive of policies that increased GDP growth and allowed companies to prosper. Support for anti-capitalist measures and wealth taxes would dwindle. It’s time to start a national debate on savings. We need to do much more of it, and we need to start today.
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