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In 2011, there were 12.2 million people of pensionable age, accounting for 19.4% of the total population; this is compared to 6.8 million people of pensionable age accounting for 13.6% of the population in 1951. It is clear that the UK’s population has begun to age rapidly since the middle of the last century, as better medical care and the development of the welfare state have allowed for longer lives. Between 2002 and 2010 alone, the number of people in the UK aged over 90 increased by 22.6%.
By 2035, the pensionable population is projected to be 15.6 million, accounting for 21.3% of the total population. The largest increase of all the age ranges will be in the over-85s category, which is set to see an increase of 115% between 2015 and 2035.
Those of 85 and over are entering what has been deemed the ‘Fourth Age’, with the Third Age having begun at retirement and lasting to approximately 84. Retirement planning, for those of the population who have planned for retirement — an ever decreasing proportion — is generally focused on the ‘Third Age’, when retirees are still able to be relatively active and independent. Pension planning as it stands tends not to focus on providing the enhanced levels of income necessary as individuals enter the ‘Fourth Age’ and may begin to have long-term care requirements.
With this in mind, it is hardly surprising that the Government’s expenditure on the various elements of the State Pension has grown by 28.9% between the tax year ending 2008 and the tax year ending 2012. By the tax year ending 2058, it is forecast that the Government will be spending 8.3% of gross domestic product (GDP) on benefits directed at pensioners, with the State Pension making up a considerable proportion of this. In February 2012, there were 12.7 million people receiving the State Pension, up from 11.8 million in February 2007.
The ageing population comes alongside an environment where the average family simply cannot afford to save. The proportion of households without any savings increased between 2007/2008 and 2010/2011 from 27% to 32%, with the continued poor economic performance being likely to blame. The current low interest rate environment is also discouraging saving, as returns received are, for all intents and purposes, negligible. 67.5% of the population said that they could not afford to save more than they currently did, according to Key Note’s exclusive market research conducted in October 2012. Only 27.4% said that workers on the average wage can afford to save enough for a comfortable retirement.
The burden is, therefore, increasingly falling on the Government to foot the bill for workers’ retirement. In 2011, benefit income made up 34.4% of the weekly income of pensioner couples and 58.8% of weekly income for single pensioners.
As a result of this growing burden, the Government has made a number of changes to UK pensions policy in the UK, including increasing the retirement age and introducing automatic enrolment into workplace pension schemes, in an effort to try to alleviate the mounting pressure on the state. However, at the same time the Government has also reduced the annual limit for contributions to pensions to minimise tax revenue lost through pension contributions.
There are numerous difficulties facing the pensions market in the UK at present. Again according to Key Note’s consumer research, 59.6% of the public said that pensions confused them, and 45.4% said that the future was too unpredictable to make saving for retirement worthwhile.
The average household in the UK was contributing just £19.70 a week to life assurance and pensions in 2010, which is not a sum sufficient to build a suitable retirement income. The number of people who are contributing inadequately are outnumbered by those who are not contributing at all.
The economic gloom the UK has experienced since the recession has resulted in an era of low overall returns for pension funds. Government bonds, one of the key investments pension funds are made up of, have been severely underperforming of late due to the Bank of England (BoE) using quantitative easing (QE) to try and infuse the economy with badly needed liquidity. At the same time, high inflation has been eroding incomes in real terms for pensioners and the value of funds held in savings accounts for savers.
Many individuals appear to have lost confidence in pension saving because of the ongoing abandonment of defined-benefit (DB) schemes, volatile fund values, and the wave of demutualisations during the early years of the previous decade, coupled with the failure of Equitable Life, the world’s oldest life assurer. This has resulted in persistent under-saving and a general ennui on behalf of the public to make savings towards their future.
The UK’s economy began to grow again in the third quarter of 2012, struggling out of the longest double-dip recession since the Second World War. However, the UK is far from out of the woods yet and must face a world vastly changed by the recession — in March 2012, Brazil overtook the UK as the world’s sixth-largest economy, for instance.
The future of pensions provision in the UK is hard to discern. The sheer number of legislative changes regarding pensions at the time of writing is likely to vastly change the way pensions are sold in the UK in the future, but whether this will be sufficient to provide a secure retirement income for the UK’s rapidly ageing population still remains to be seen.
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