Here at Moolr we wrote recently about how those not flush with money (which is probably most of us) could move towards a future of actually having money in the bank, of managing to save money. However, recent figures suggest that it is indeed a growing number that don’t have spare money right now. We consider the following: are savings at an all-time low?
This may not surprise you. At the tail-end of a vicious recession, with the government ploughing ahead with seemingly endless cuts, it is not a great time for many. House prices have remained high and growth has been poor. I discuss here however how the UK wage slump could be coming to an end.
Confidence in the economy is finally growing, yet this has actually deterred saving for some. People feel their jobs are more secure and their homes will keep increasing in value, so don’t feel pressured to put money aside. I have a number of friends who have not taken out a pension as they see the equity in their home or that of their parents as their pension pot. The International Longevity Centre (ILC), in their report, “Consensus Revisited”, said Britain was in the middle of ‘a lost decade’ of savings. This would not end for many years. Seeing savings at an all-time low is a bad sign for them.
This year, they estimate that households will save on average just 5.4% of their take-home pay. This would be the – the lowest percentage since records began 20 years ago. It is half of the figure in 2010, and estimates show it may reduce further to 4.8% by 2019. In 2010, because of the recession, and the lack of job security and the uncertainty about what the future held, meant many putting aside money.
Since then, people increased their level of credit card debt and taken on larger mortgages. Wages have stagnated, and thus there’s less left for savings.
Figures show that the average employee contributes 2.9% of their salary towards a pension. Low interest rates have also deterred people from building savings – thus making it hardly surprising to discover savings at an all-time low.
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The only silver lining is the pension “auto-enrolment” scheme introduced by the government in 2012 that has seen millions sign up for pensions that may have not done so otherwise, reversing a long-term decline in pension sign-ups.
And with a population living longer and longer, pensions are a clear problem. In 2012, women retired at an average age of 63, and had to fund 26 years in retirement. Men had to fund 21. The retirement period has predictably lengthened significantly over recent decades. And with people having to fund up to a third of their life in retirement, savings are crucial. Too many are still not set up for the time when they stop working for good.
The report has shown that on average employees contribute just 2.9% of their salary to a defined contribution pension, compared to 5.9% for defined benefit schemes. Employer contribution rates are even starker, averaging at 6% for defined contribution schemes but 15% for defined benefit schemes.
A report by pensions and investments company Scottish Widows came to a similar conclusion in 2013, pointing out that the UK had been hit by a “triple-whammy” of a weak economy, later first-time home buyers and an ageing population.
Their report found that 20% of Britons aren’t saving at all, with 45% not saving enough. However, expectations for retirement income was nevertheless increasing even with savings at an all-time low.
Other findings included people feeling that on average they needed £25,200 a year to live comfortably in retirement. The reality is that up to half of retirees may get only half of that.
The problem with many workers’ attitudes to retirement is that every year of delaying taking out a pension wipes a lot of money out of the final pot. Many don’t start pensions until they reach their thirties. If they had started five years earlier, it would add up to 20% to the final pot. Ten years earlier, and that goes up to a possible 40%.
Thankfully, part of automatic enrolment’s caveats is the rule that all employers must offer pension schemes to employers within the next five years, so hopefully we will see continued improvement in the figures.