Fears for retirement as cost of living crisis hits Scots pensions

The study by the trade group, the Pensions and Lifetime Savings Association has raised concerns that Scots are not doing enough to save for pensions, with 52% saying they cannot afford to put money away at the moment.

Age Scotland was concerned that people might opt out of preparing for retirement just to make ends meet.

The trade association whose members are involved in designing, operating, advising and investing in all aspects of workplace pensions argues that looking beyond the uncertain economic outlook, the Government should increase the level of automatic enrolment contributions for workplace pensions to ensure that people have an adequate income when they retire.

They have suggested that there is a rise from today's minimum contribution of 8% of qualifying earnings to 12% of all salary.

The association says the view appears to have strong backing with 46% of Scots believing that pension contributions should rise from the current level of 8% to up to 12% with less than one in ten disagreeing with the proposal.

Auto-enrolment was rolled out gradually from October, 2012 to tackle fears that many people were not saving for their old age, with the biggest employers coming on board first.

Workplace pension schemes are a way of saving for retirement through contributions deducted direct from your wages. For those eligible for automatic enrolment, the employer has to make contributions into the scheme.

In the last decade the scheme has seen millions of people brought into pension saving for the first time.

The minimum that can be paid into workplace pensions has also edged up over the years with the minimum contribution of 8% - with employers paying at least 3% and employees, who benefit from tax relief on payments, making up the remaining 5%.

Under PLSA's preferred approach, by 2030, the pension contribution would be “levelled-up” – split evenly between employers and employees – with the employer paying 3% more than now and the employee paying only 1% more than now. If the employee cannot afford the extra 1%, they should be given the choice of staying at the current level of 5%.

Adam Stachura, Age Scotland’s head of policy: “This study highlights yet another impact of the cost of living squeeze for huge numbers of people in Scotland. We know just how important it is to start saving for retirement as early as possible and to plan for your future but also that there are big challenges facing people which could stop this from happening. While the introduction of pension auto enrolment has been a positive step towards improving the financial health of people when they retire and could help to close the gender pension gap, if people opt out, even for a short period, because they need that money to pay their bills today then they could face a pensions shortfall when they retire.”

“It is already the case that two thirds of today’s retirees risk not having enough of a pension pot to sustain their retirement plans and could run out of money in later life, so regular and growing contributions throughout your working life is incredibly important. But that is easier said than done at times.”

The PLSA says the government is right, as it has promised, to introduce automatic pension saving for 18-year to 21-year-olds and to increase retirement saving by basing the contribution on the first pound of savings, rather than only above the lower earnings band of £6,240.

The Government has said it will do this by the mid-2020s and the PLSA urged UK ministers to put the change in legislation as soon as possible.

The study found that while some 82% of Scots who are not retired accept that it is a good idea to pay into a workplace pension, there remains a number of key fundamental misunderstandings by savers about their pensions, with many unsure how their contributions were being invested on their behalf.

The survey revealed that only 39% of people know the minimum contribution rate that people can make through automatic enrolment.

And around two in five are not sure if the government gives tax relief on their pension contributions while over a third (34%) are unsure if their pension savings are invested in stocks, bonds, or other investments.

Nigel Peaple, PLSA director of policy and advocacy, PLSA, said: “Many Scottish savers are saying they face substantial financial difficulties over the short-term due to the Covid-19 pandemic but, over the longer term, the public in Scotland are also seeing the value there is in saving towards retirement in a workplace pension.

“The picture across the whole of the UK shows that many people do not fully understand the complexities of pension saving so it is important that the Government’s policy on pension saving takes account of this. In particular, alongside industry measures like the Retirement Living Standards which help people understand how much different lifestyles cost in retirement, the rules of automatic enrolment should be designed to give people an adequate income.

“We, therefore, support the UK Government’s promise to extend pension saving to younger people across the UK in the mid-2020s and to increase the amount of saving so that it is on the first pound of salary. But it is also important that the Government “levels-up” pensions so that, by the end of the decade, pension contributions are increased from 8% to 12%, split evenly between employers and employees.”

A separate analyis by the Institute for Fiscal Studies (IFS) found that record levels of 65-year-olds are choosing to stay in work as a result of increases to the state pension age.

It said that increasing the pension age to 66 has led to around 55,000 more 65-year-olds in work across the UK, with employment rates reaching 42 per cent for males of that age and 31% for women.

This is likely to be an all-time high for female 65-year-olds and the highest on record for men.

The research also revealed that those in more deprived communities are more likely to be adversely affected by the policy change and are being forced to work longer as they cannot afford to retire.

The Department for Work and Pensions (DWP) said the number of people saving in workplace pensions across the UK remained stable in 2020, despite the pressure on household budgets triggered by the coronavirus pandemic.

Overall, 88% of eligible employees, or 19.4 million, were participating in a workplace pension in 2020, which was similar to 2019 figures.

In the private sector, the highest participation rate was in Scotland, at 89% of eligible employees.

A fall in employee contributions was observed during the first half of 2020 as the impact of lockdown started to bite, but this was followed by a recovery in the second half of last year.

Last year a study by Standard Life Aberdeen found that two in three Scots who are close to retirement do not have the pension savings to sustain their planned income.

The inaugural Class of 2021 report surveying those planning to retire this year, revealed how ready people are to retire, identifying what worries and excites them most, and how recent events have impacted their plans for retirement.

And it found that 66% of 2021 retirees in Scotland risk not having enough for what they need when they stop working.

The research which examined people's pension pots against their spending aspirations found that a 2021 retiree in Scotland planned to live off £21,331 a year in retirement – almost £10,000 less than the average UK household income (£29,900).

A UK Government spokesman said: “We know this has been a challenging time for many people, which is why we’re providing support worth around £12bn this financial year and next to help households across the country with the cost of living.

“Automatic enrolment has succeeded in transforming pension saving, with more than 10 million workers enrolled into a workplace pension to date and an additional £28 billion saved in 2020 compared to 2012.

“Current contribution rates have been phased-in to balance bringing people into saving with affordability for both savers and employers. As with other areas of public policy, we will of course look at this and consider the optimal approach, in light of the Covid-19 emergency and support for our economic recovery.”