I thank the Minister for his intervention. The suggestions for the future are about to unfold before his very eyes, as he may have anticipated.
Analysis by the Pensions and Lifetime Savings Association suggests that the current contribution rate of 8% is simply not enough for people to have a good standard of living in retirement. I fear that will be the case for many people in several years’ time who have been auto-enrolled into workplace pensions and assume that, as the rate is automatically set by the Government, that means they will have a comfortable pension pot when they retire. Unfortunately, many people are simply not engaged enough with their pensions to realise that until it is too late, despite them being fundamental to their future. I fear auto-enrolment has created the complacency I mentioned earlier.
To combat that issue the PLSA has proposed an increase in the minimum contribution level, to at least 12%, and I agree. Forty-three per cent. of savers do not know how much of their monthly salary they should be saving, in any case, and the increase would benefit a
great many individuals, by increasing their savings further. Additional changes could include reducing the starting age to 18 and removing the lower earnings limit, so that every penny of earned income counts towards pensionable pay. According to the Association of British Insurers that would have the potential to save a further £2.5 billion in pension pots. It would not only increase the number of years over which an individual saved, and consequently increase the pot; it would emphasise the importance of saving from a younger age.
What else can we do with auto-enrolment? Why not think a little more outside the box and create a savings culture in the UK? If covid has taught us anything it is the importance of preparedness and planning for every eventuality. One of the bedrocks of financial planning is having an emergency fund in place, but putting money away each month is perhaps easier said than done—there is always something else to spend it on.
We could look at including a savings element in auto-enrolment. Why not, when payroll makes a deduction for the relevant amount for a pension, put 1% into a savings pot at the same time? There could be an auto-enrolment ISA, and people could be given the ability to increase the percentage to what they can afford. Creating a savings culture on the back of pensions policy could be one of the more pleasant side effects of covid. Many people might be more open to having emergency funds to combat future challenges.
Another area of pension policy that could benefit from further positive change are the annual and lifetime allowances. Bearing in mind that that is a Treasury issue and not necessarily one for the Department for Work and Pensions, I shall not labour the point, but there is no need for an annual allowance if there is a lifetime allowance. Saving should be encouraged, and individuals should not be penalised for taking on extra work and saving more into their pensions. That happened to doctors recently, leading to them not taking on shifts and procedures because of the danger of a significant tax bill. A potential solution to that issue would be to remove the tax penalty for breaching the annual allowance, but keep the restriction on the amount of tax relief available to current limits. There would be no additional cost to the Exchequer, and people would be able to continue saving into their pensions in the same way. Yet those who were unnecessarily penalised under the limits of the annual allowance would not be at a disadvantage. As I have said, it is a Treasury area, and I am sure that the Minister will take great pleasure in passing it along.
Wider change is needed in the pensions industry, and one way to achieve that and encourage people to engage earlier with pensions is by improving the accessibility and reach of financial advice and guidance. Despite having been a financial planner involved in the pensions industry for many years prior to coming to this place, I admit that the topic of pensions can be complex. I can see how, for many without such experience and knowledge, pensions could be viewed as hard to understand or even, God forbid, a boring subject—a terrible thought.
I welcome the Government’s push for a simpler regime, which is coming down the line, to make statements more comprehensible for both the consumer and professionals. Members would not believe the wide range of disparate information that pension providers send out to customers, making it impossible not only to understand what they have but to make accurate
comparisons between providers. It is currently extremely complicated, and I look forward to simpler statements that will put the consumer in charge. I keep my fingers crossed that that policy will not be several years in the making, as the wheels of Government tend to take rather an age to turn.
It is right to empower individuals to make their own decisions about their futures, but we should ensure that before they make such life-changing decisions they feel informed and supported, and have considered their own unique circumstances. Advice and guidance about pensions needs to be accessible, affordable and available. Despite the benefits that financial advice can bring, only 8% of all UK adults have received it. That is, amazingly, an increase on previous years, but it is still shockingly low, and it puts individuals’ retirements at risk. Whether that is because people feel that financial advice is unaffordable or only for the wealthy, or because they feel it is a risk and do not trust the financial services industry, we need to work actively to change those perceptions and show that financial advice is for everyone.
I can assure the public that the vast majority of advisers whom I have worked with will treat someone’s £30,000 pension pot with the same care and diligence that they will treat someone’s £300,000 pot, because each sum is just as important to the individual concerned. Indeed, the smaller pot can be considered to be much more important to that individual in many ways, because it will often be a lower-earning individual’s only pension provision, and so the risks of it running out too early are more significant.
If we do not promote the need for and the benefits of financial advice, I worry that we will have a retirement crisis on our hands 20, 30 or 40 years down the line. Recent data shows that 35% of the adult population say they do not have a pension. Of those who do have one, 36% are not sure how much is in their pot. Even more worryingly, the uncertainty around pensions goes further than uncertainty about individual circumstances, with almost half the population admitting that they do not have a clue about how much income they would need to retire comfortably. That clearly shows that widespread advice and education regarding pensions and retirement are urgently needed if we want people to be able to live out their later years in financial security and comfort.
In the past, these types of financial decisions and risks were shouldered by employers, pension providers and life insurance companies. Now, however, with the introduction of greater flexibility and freedom to the pensions marketplace, it is increasingly down to the individual to decide these matters, which is a wonderful thing in some respects, but worrying in others. We should not really place all responsibility for such important decisions on to people themselves. Instead, we should ensure that people feel supported and know where to turn for help and advice.
Financial advice is not only needed to help people feel more informed and aware when they make decisions that will affect their lives; it also adds real value to people’s pensions, providing them with a better retirement in the long run. A recent report by the International Longevity Centre found that those who have sought professional financial advice are better off by an average of £40,000 in their pension pot compared with those who did not seek advice. That is not an insignificant amount of money. Ensuring that financial advice is seen
as a viable option for people is not only the right thing to do, but crucial if we want people to have the best possible future, as well as the peace of mind that they are making the right decisions to benefit themselves.
Most importantly, how can we make sure that people are accessing the right financial advice and support? Forcing people to access support is not an option. Some people will not even take a vaccine to save lives, for goodness’ sake, so mandating things just because people have an in-built aversion to being dictated to does not work.
One option, however, is to encourage individuals to use guidance services, such as Pension Wise, the free and impartial guidance service that was set up in 2015. Accessing guidance is often the first step towards accessing full financial advice and should be greatly encouraged. Seeking guidance helps people to gain a good initial understanding about their options and also helps to boost their confidence in their ability to do things such as avoiding pension scams, which, sadly, are all too common.
In addition, we know that financial guidance is a great enabler for the full advice process. Data from Pension Wise’s user evaluation report recently found that 36% of customers who booked an appointment with Pension Wise went on to speak to a financial adviser in the following three months, compared with only 22% of non-users. That highlights the fact that we need to emphasise the benefits of these services, and ensure that people use them as early as possible to improve advice take-up and improve the financial outlook for many individuals in the UK.
Currently, it is far too easy to opt out of taking this free guidance from Pension Wise. Many studies over many years have shown that individuals need several exposures to information before they start taking action, so perhaps we need to start them on that journey a little bit earlier, so that they are engaged in the process when the time is right.