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It's time to defuse the pensions time bomb

Published: 20/09/2018

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We’ve reached a potentially critical point in the debate on pensions: research shows that younger employees are not currently saving enough for their retirement… and don’t appear to be too bothered about the future. If this attitude persists, Millennials face the prospect of a dramatically extended working life or impoverished retirement.

To coincide with national Pension Awareness Day, VitalityInvest recently commissioned a UK-wide consumer poll of 1,500 adults, to test people’s ambitions and expectations for their later years. The rather sobering results – revealing that nearly half (44%) of UK adults do not think they will have enough money to enjoy their ideal retirement1, for example – reinforce the increasingly held belief that new solutions are needed to help savers overcome the obstacles they face in achieving the financially secure future they all crave.

A dawning realisation in middle-aged savers

While the survey revealed that people have grand plans for an active, sociable life after work, it also highlighted profound levels of personal anxiety regarding whether they would be able to afford the retirement of their dreams. These worries were greatest for those in mid-career, where half of those surveyed in the 35-55 year-old age bracket expressing concerns for their future financial wellbeing.

Are Millennials burying their head in the sand?

Perhaps predictably, Millennials were far more sanguine about their prospects: only 39% thought that securing an adequate income in retirement might be a problem. And that’s no great surprise, given that people in the early stages of their careers tend not to give too much thought to their long-term needs, choosing instead to pursue the allure of instant gratification. Just to underline the point, evidence gathered by the Institute for Fiscal Studies2 shows that, rather than saving more to overcome these challenges, those born in the 1970s and later are saving at a lower rate than previous generations at comparable ages – in fact, their net saving rate overall is negative!

Increased life expectancy: the elephant in the room

While this attitude towards saving may not be entirely rational, it is understandable. People in their 20s and 30s in particular, but not exclusively, face considerable uncertainty when thinking about the future: they also have a poor understanding of their personal life expectancy and the implications of a longer life on the amount they need to save. But with more of us expected to reach the ripe old age of 90 and beyond3, it’s an issue that demands greater consideration at the very least.

A golden opportunity for advisers

The good news about these findings is that the seeds of opportunity - for the creation of more appropriate products and provision of meaningful advice- are already embedded in the problem. With the right products and the right incentives, as well as a greater understanding of how beneficial it is to start saving earlier for later life, these findings actually represent a huge opportunity for the financial services industry.

Introducing investments fit for the future

That’s because, where there’s a problem rooted in lack of understanding and behavioural biases, there must also exist an opportunity to create solutions. This belief guided us towards the creation of the VitalityInvest product range. In order to overcome people’s resistance to saving from a young age, we’ve built incentives into our products that reward people for persistent, long-term investment, in the form of boosts added to their accumulating savings every five years. This feature really illustrates and emphasises the power of compound interest: the sooner you begin to save, the greater the rewards in the long run.

For those prepared to commit to their future, we also encourage them to extend this commitment to a more responsible attitude towards their long-term health. Those that engage could get discounts of up to 100% off their product charges.

And to raise levels of understanding, Our LiveWell Financial Planner uses Vitality research on life expectancy* - developed in collaboration with the University of Cambridge and RAND Europe - that allows people to see how changing their lifestyle affects their life expectancy, and what savings are required to sustain a desired income through retirement.

In the end though, what’s needed in order to bring younger savers into the long-term savings tent is advice that speaks to them – and shows them the products that are geared towards their needs. Frankly, failure to do this is tantamount to missing out on the biggest untapped sector of the market for financial advice. And while this sector may not look like the most lucrative today, it is rich with opportunities to build for the future – not just the future of the younger generation of savers, but by extension the future of those that advise them.

*Development of Vitality Age V.3, 2018.

VitalityInvest is a trading name of Vitality Corporate Services Limited. Vitality Corporate Services Limited is authorised and regulated by the Financial Conduct Authority.

Vitality-commissioned research carried out by Opinium, August and September 2018

2. Institute for Fiscal Studies, The economic circumstances of cohorts born between the 1940s and the 1970s, Andrew Hood and Robert Joyce, December 2013

3. NHS, UK life expectancy expected to rise to late 80s by 2030, April 2015