I’m going to start with some very good news. Numbers out from the ONS data crunchers on workplace pension participation in the UK show that 22.6mn employees, or 79 per cent, are now enrolled in a pension scheme.
Before auto enrolment, that number was only 47 per cent overall — and a genuinely pathetic 32 per cent in the private sector. A total of 22.6mn people saving into pensions adds up to real money: in 2019-20 savers made combined pension contributions of £31.3bn — up from £27.9bn the year before.
These pension savings will keep growing (the under-35s are contributing an average of £245.40 a month) and keep compounding. They will also stay with their owners. Fifty years ago, if you moved jobs, you forfeited your pension rights with your previous company when you walked out the door: you lost your employer’s contributions, investment gains and got back only the cash you put in — with income tax deducted.
That made leaving anywhere after more than a couple of years a very expensive decision — one reason, by the way, why labour mobility was lower back then — it was less corporate loyalty than pension lock in.
Today there might be a trying hour of admin involved in shifting your assets, but your pension is always yours. If you and your various employers contribute to it for 30-odd years it should also be well worth having — it will have compounded to a level that will support a reasonable living standard, particularly if the state pension stays at its current level in real terms. Today’s young are less likely than their parents to retire to a home of their own but are more likely to finish working with a private pension income, which is nice.
Our system isn’t perfect. Outside the public sector — where employees get defined benefit pensions — set payments based on their previous salaries — most of us have defined contribution pensions which are more dependent on stock markets than is ideal.
There is also a not-getting-the-detail problem. The latest “Show Me My Money Report” from Interactive Investor suggests that around half of those in pension schemes don’t know how much they contribute to them or how much is already in them.
Three-quarters of pension savers also have no idea what they pay their pension provider — there is says Interactive Investor an “engagement gap” here, one that over an adult lifetime of pension saving “could add up to an average of around £120,000 in unnecessary fees and missed investment growth.”
That’s real money. But even so it is hard to overstate just how well funded UK retirements are relative to those in other countries. OECD numbers show that pension savings in the UK come to around 126 per cent of GDP, making our system one of the best funded in the world. Some countries are in even better shape — Australia, Iceland and Switzerland being the stand outs.
But most are definitely not: in the likes of Germany, France and Italy the equivalent numbers are all under 10 per cent. This partially reflects the fact that they rely on pay-as-you-go earnings-linked state-backed pensions. That’s fine if you trust government finances to be good enough to keep paying out. Me? I’d take private funded over public unfunded any day.”
The bad news — you knew it was coming — is that there are gaps, namely those working in the private sector after corporate defined benefit pensions began to disappear and before auto enrolment. I refer you back to the 32 per cent.
Some of them will have lovely pensions of course — they may have been earning large amounts, have understood how pensions work and been saving into personal wrappers in the days when there were no limits on annual or lifetime contributions (nor on the amount of tax you could claim back) — and when one of the greatest bull markets of all time was getting under way.
But many others will have nothing of the sort: the average pot size among the over-55s at the moment is £132,400 — and that will be very unevenly distributed.
On the plus side what the majority of those without an actual pension will have is a house. One of the greatest housing booms ever has been under way in parallel with the equity bull market and 75 per cent of over-65s in the UK own their own home outright, with no mortgage, on ONS figures.
How about that? The very same group that has been horribly disadvantaged when it comes to pension provision have been hugely advantaged when it comes to physical asset owning. This brings us neatly to equity release — the obvious way to turn a house into an income stream. In an ideal world it makes more sense to downsize than to even look at this — take the cash you get out and use that to create an income.
But clearly a lot of older people would rather not — which is why after a Covid slowdown the equity release market is back on a tear. Total lending to the over 55s grew 24 per cent to £4.8bn year on year in 2021 with average loan sizes also on the up according to the Equity Release Council.
Equity release has a well-deserved reputation for being a bit dodgy, as the Financial Conduct Authority found in an investigation.
Everyone will have heard the stories of tiny loans coming with awful interest rates that compound to eat up the entire value of a house — and sometimes more. But times have changed — a bit. Rates are lower, you can arrange to take money out of your home by regular drawdowns rather than one lump sum (which cuts the total interest cost), and most lenders have guarantees that there will be no negative equity.
Also, after the rules were put on hold during the pandemic, it is once again compulsory for anyone taking out an equity release plan to have at least one face-to-face meeting with a solicitor before signing anything.
You should see if you can get an ordinary mortgage before you look at equity release, as these are cheaper and more flexible. You should look very carefully at any early repayment penalties and watch for fees as you go (paying them upfront rather than adding them to a compounding debt); you should be aware that if house prices fall your loan might feel uncomfortable; and you should definitely not touch any of this without a genuinely good financial adviser by your side. Industries don’t get dodgy reputations for nothing.
But one thing you shouldn’t worry about? Leaving a debt-free house to your kids. They’ll have a pretty good pension to fall back on.