In this blog, we look at the challenges facing consumers trying to understand their retirement plans and ways to help them take control of their savings in retirement for life.
If only retirement planning were a walk in the park. The big industry push to encourage people to take an active role in saving for retirement, including initiatives such as the pensions dashboard, would be surplus to requirements. The reality, however, could not be in starker contrast.
For the everyday consumer, retirement planning can be challenging and confusing, underscored by recent research, which found that 17% of Britons feel they aren’t saving enough for retirement. A fifth believe they will never accrue the financial security to retire.
Importance of advice
There’s no quick and easy fix to improving consumer confidence here. The most obvious solution is for people to take advice, but it's widely accepted that the industry needs to do more to demonstrate its value. The expertise and soft skills of a professional financial planner, combined with tools such as risk-profiling questionnaires and cashflow models, prove valuable in helping clients understand what their financial goals are and what they need to do to reach them. However, the sad truth is that many people, in fact, most people, continue to shun advice, choosing to either go it alone or do nothing. Recent FCA research found that only 8 per cent (4.1m) of the population received financial advice in the past year2 - highlighting the extent of the so-called ‘advice gap.’ Digital advice solutions and guidance provide the most viable means to narrowing this gap, but their benefits are largely failing to reach the ears of consumers.
Can the dashboard drive engagement?
The fear is that many are placing reliance on minimum auto-enrolment contribution levels and the state pension, and risk receiving a nasty shock at the point of taking benefits. Nearly half (45%) of all UK citizens hope for a retirement income of at least £20,000 a year3.
According to the PLSA living standards, this amount would offer an individual a ‘moderate’ standard of living with more financial security and flexibility.
A further problem is that large swathes of the population have little idea what their current provision might provide for them in retirement. It appears both the government and financial services sector are hanging hopes on the pensions dashboard to solve the problem, but the project isn’t exactly experiencing the smoothest of rides. Initially due to be ready in 2019, its launch has since been pushed back to 2023. While further delays are indeed possible, the Pensions Dashboard Programme recently announced the current timetable is on track, offering some much-needed encouragement.
Regardless, once available the dashboard will (hopefully) provide the foundation for consumers to build their retirement plans upon. People frequently change jobs nowadays, accumulating numerous pension arrangements in the process. And in the absence of consolidation, keeping track of the aggregate value can be challenging. Auto-enrolment defined-benefit entitlement – and using this as the building block, which can then be complemented by forecasting tools to identify and work towards plugging any retirement income shortfall.
What does the future hold?
We can take heart from the success of auto-enrolment. The government’s automatic enrolment valuation report 2019 found that opt-out rates for its flagship scheme stood at just 0.76% from 10.2 million enrolled4.
The workplace presents a sizeable opportunity to roll out advice to the masses. Though stopping short of suggesting employers carry the full burden here, they appear the best avenue to direct millions of people closer to their retirement plans. Technology, such as the previously mentioned digital advice solutions, is starting to be incorporated into small and medium-sized companies – a notable and promising development. Instead of relying on consumers to seek out advice, greater success may be found by taking advice from them.
We appreciate this fails to address the lack of retirement engagement from self-employed workers - and indeed these will prove a tougher nut to crack. The idea of rolling out auto-enrolment to those working for themselves has been floated many times. And while sounding great in practice, applying a rigid payment system like auto-enrolment to people with inconsistent earnings is riddled with impracticalities. A few years ago, the government trialled nudges when self-employed workers use accounting and banking systems. No panacea, obviously, but it would get people thinking about their retirement finances - an important first step.
For consumers to play an active role in forecasting for retirement, then we may have to give them a jump start. It will never be a walk in the park, but we can help make it less of a slog.
So what next?
Start your journey to improved consumer engagement, better consumer education and understanding, and give your business the digital solutions to stand out in the marketplace.
1 ScottishWidows https://www.scottishwidows.co.uk/about_us/media_centre/reports/retirement-report/ - 2019
2 FCA
https://www.fca.org.uk/news/press-releases/fca-publishes-evaluation-financial-advice-market - December 2020
3 Unbiased
https://www.unbiased.co.uk/news/financial-adviser/one-in-six-over-55s-have-no-pension-savings-yet - December 2020
4 Auto-enrolment evaluation report 2019