Mind the generation gap: a plan to solve the pension crisis
It is no secret that the UK faces a pension crisis. Millions of Britons under the age of 50 are not saving enough and will struggle to live comfortably in retirement. The harsh reality is that the 'baby-boomer' generation, who are already retired or retiring soon, will be the last to enjoy a comfortable old age - unless we take urgent action now.
If we fail to act, the crisis is only going to get worse. A quarter of us are saving nothing at all; that was one of the key findings in Brewin Dolphin's recently published Family Wealth Report, produced with the thinktank Centre for Economics and Business Research.
The report highlights a huge gulf between retirement expectations and reality. Dealing with the latter first, UK households now save an average of only 6p out of every £1 of disposable income, against 15p in 1992.
UNREALISTIC LEVEL OF SAVING NEEDED
Another worrying finding is that nearly a quarter of respondents with a household income of between £60,000 and £100,000 said they are saving less than 1 per cent of their net income.
But when it comes to having a comfortable lifestyle in retirement, the average 18 to 44-year-old regards an income of £30,000 a year as sufficient. Of this amount, around £8,000 would come from the state pension and £22,000 from a personal pension.
To buy an inflation-linked annuity paying this level of income, a pension pot of £725,000 is required. This is more than three times higher than the average expected size of this age group's pension pot, which is just £175,000.
To secure £30,000 a year of income in retirement, an 18-year-old would need to contribute £437 a month to a pension at today's prices, adjusted for inflation.
On the same basis, a 30-year-old would need to save £793 per month and a 44-year-old £1,840 a month, based on a 4 per cent return each year after charges.
That level of saving is unrealistic for many, though not, as some suggest, because the under-50s are too busy spending their money on holidays, entertainment and 'living for today'.
Younger generations want to save more for retirement and a good pension income is one of their most important financial goals.
But rising living costs, low interest rates and the battle to get on the housing ladder mean they don't have enough spare cash to save. Simply telling younger people to invest more of their income won't work.
GIFT ASSETS TO THE YOUNG
A potential solution to this crisis could lie elsewhere. We are calling on older people to fundamentally rethink how and when they pass on wealth to younger relatives.
Providing they can afford it, older people should reconsider the long-established practice of gifting assets to younger generations in their wills. Instead they should look to make regular financial contributions to their children and grandchildren while they are alive.
Wealth is overwhelmingly concentrated in the older generation. Over-65s are sitting on an estimated housing wealth of £1.3 trillion. Passing on some of this wealth now by making regular contributions to a grandchild's Junior Isa or pension could transform their future financial position.
Gifting wealth while you are still alive can also save on inheritance tax (IHT). If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for IHT.
The potential long-term investment growth, the effect of compounding and the IHT savings mean that one 'silver pound' gifted and invested today could be worth three times as much to grandchildren later on.
As an added inducement, we are also calling on the government to introduce a 'saving for grandchildren' tax incentive. This could include making gifts to a grandchild's Junior Isa or pension immediately IHT-free.
As a solution to the pension crisis, this approach benefits from being both workable and easy to implement. Older people may be worried about passing on wealth they might need in the future.
However, planning can allay those concerns, showing how much they can afford to give away and giving them confidence to help their children and grandchildren now.
Liz Alley, divisional director of financial planning at Brewin Dolphin.