A looming pensions crisis – and how we can avert it

Research by the Social Market Foundation, sponsored by Phoenix Group, estimates the average person reaching retirement age is almost £250,000 short of the pension pot they’ll need to deliver the pension income they want. That’s a savings gap of £132 billion across the UK.

Let those numbers sink in. They’re alarming, to say the least. Even more alarming is that they’re only half the problem. It isn’t just that people aren’t saving enough; they’re also in danger of making the wrong decisions with what they have saved.

The questions facing savers today are more complex than ever. Should I save into my pension or pay off my mortgage? Can I afford to withdraw cash from my pension pot now? Should I sell my small business? Which products should I buy? Are there tax implications?

They’ve become harder to answer in today’s labour market, where people change employer every five years on average, accumulating numerous disparate pension pots. They’re even harder for the self-employed and people with property or more complicated investments.

The fact that two-thirds of those aged 50 to 64 in our country are taking such decisions without any professional advice or guidance is therefore deeply concerning. At Phoenix alone, that’s 3.5 million customers. That doesn’t sit comfortably with a company whose purpose is ‘to help people secure a life of possibilities’.

This could become a crisis if unaddressed. The generation approaching retirement now are largely too young to have benefitted from a fully defined benefit pension, but too old for auto-enrolment to have made a significant difference to their savings. Making the right choices will be vital for their retirement prospects.

What can we change? Getting people the advice and guidance they need will require a multi-pronged approach.

Independent financial advice will continue to provide the gold standard of guidance, but can’t be the answer for the majority of people, particularly those with more modest pension pots.

Pension Wise, the government’s invaluable free service, gives information to savers aged over 50 and will be part of the solution. But it cannot currently directly answer questions on what the best options are for savers as individuals. We’ve therefore called for its scope to be re-examined.

Everyone involved needs to do more and must be given the opportunity to do so, including providers such as Phoenix Group. We hear our customers’ questions and understand the support they’re seeking. We believe it’s our responsibility to help people make good decisions. While providers are currently limited in what support we can give, post-Brexit, there is an opportunity to re-examine the regulatory framework we all operate in. We hope this opportunity is used effectively.

Collaboration will be necessary. That’s why we’ve called for the government to convene the regulator, the advice community, providers and consumer groups into a working network to understand the support that consumers need and how the industry can deliver it.

How people manage their future finances is often the difference between security and vulnerability in retirement. We need to make sure the millions of savers heading towards retirement get the right answers to the difficult questions and achieve financial security.