People don’t save enough for their retirements.
People in their 30s could be forced to continue working until they are more than 74 unless they dramatically increase the amount they save, an insurer has warned.
Prudential said people in their 30s were setting a side an average of just £62 a month towards their retirement – £340 a month less than they need to.
The group said in order for someone on average earnings to retire at 65 on two-thirds of their pre-retirement income, including money they would get from the state pension, they should actually be saving around £400 a month
Why don’t people save more?
There are two reasons for the under-saving. First, the government strongly disincentivises saving by the poor. Most means tested benefits are not payable to anyone with financial assets of more than a specified amount. It used to be £15,000 – I don’t know the up-to-date figure. But it means that anyone who is – or thinks that in the future they might be – on means tested benefits, has a strong disincentive to avoid having savings of any substance.
Gordon Brown has added to this the Pension Credit which is a means-tested benefit for the elderly. This has pushed the discouragement to saving up towards those of more means. The pension credit means the benefit of saving – including saving through a pension fund – are seriously reduced unless one accumulates well over £100,000.
The second way in which the government has discouraged saving is through the state pension. The existence of the state pension makes people think, ‘The state is looking after my pension. I don’t need to think about it’. At some point in their lives, they discover this is not true. The state will not look after them in old age. The state pension is tiny. But they often discover the truth too late to do anything about it.
An honest politician would say: “Don’t rely on the state pension. It is very small and it is continuing to get smaller compared to average incomes.”
A decent politician would take means testing out of the equation by easing out the pension credit.
An open-minded politician would, as Peter Lilley did, propose a new pension scheme for younger people which would be invested in stocks, shares and bank deposits.
A radical politician would propose the gradual but wholesale abolition of the state pension, leaving only income support for those people who had made no provision for their old age. That is the policy that would have the most dramatic effect in encouraging a saving culture in Britain, just as it has a dramatic effect in Hong Kong.
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