Budget 2014: Pension reform means little if you’ve got nothing to put in the retirement pot

The Budget delivered measures for better-off pensioners and savers – but the poorest have little to save.

This week’s Budget has been heralded as a good one for pensioners and savers. The Chancellor’s pension proposals are pretty radical and include flexibility to the system: ending compulsory annuities, making it easier and cheaper for people to draw down their pension post and high yield bonds for the over 65s. Proposals for savers include a new ISA that allows tax free savings up to £15,000 per year.

Whilst rewarding savers is welcome, in the long term most of these proposals don’t help the many hard-working people unable to save much, if anything, for their old age. And when we look at the evidence, the idea that the Budget represents a blanket benefit to current pensioners feels overly optimistic.

Pensioner poverty has been falling steadily over the past 50 years. In the 1960s/70s pensioners were more likely to be in poverty than anyone else. Now they are the least likely. However, with pension credits not protected in the welfare cap, pensioner poverty risks being undermined. Currently 1.6 million pensioners are still living in poverty and many more have struggled to save for their retirement: 26 per cent of pensioner couples (37 per cent of single males, 43 per cent single females) have less than £1,500 in savings. Twenty-eight per cent of single female pensioners have no savings at all.

We know that in the long term reforms to the state pension will mean that the single-tier pension will be less generous than the current pension system for most people, particularly for those born after the mid-1980s. The only major exception is long-term self-employed people.

Recent research for JRF by the Institute for Fiscal Studies, also suggests that those born in the 1960s and 1970s are likely to be no better off in retirement than their predecessors unless they inherit and we know that those who are already wealthy are most likely to inherit. When compared with those born a decade earlier at the same age, these cohorts:

  • have no higher take-home income;
  • have saved no more of their previous take-home income;
  • are less likely to own a home;
  • probably have lower private pension wealth; and
  • will tend to find that their state pensions replace a smaller proportion of previous earnings.

So, whilst the current picture of savings and income in retirement is pretty mixed, there are likely to be even greater challenges for younger generations to achieve a comfortable old age. This week’s Budget proposals will do little to support those on lower incomes, with less ability to save.

Flexibility in the system is great but it means nothing if your pension pot is small or non-existent.