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Calls to simplify the system

Workers ‘lack basic understanding’ of pension rules

pension choice

More pressure is being applied on government to simplify the pension rules following new research revealing continuing confusion and ignorance among workers about how much they need to save.

PwC research reveals that someone starting work aged 22 will need to save 15% of their annual salary towards their pension in order to reach their desired retirement income.

If they don’t increase their current contribution levels, they could end up with a £4,000 a year shortfall between their pension savings and desired retirement income.

PwC surveyed 1,250 UK adults, including 158 in Scotland, about their retirement plans and understanding of the pensions system.

Pensions’ analysts found that one of the biggest reasons that people are not saving more into their pension is that the system is too complex and they don’t understand it. Almost half of Scots surveyed (49%) cited this as a reason. Across the UK, the figure is even higher for women (63%) and younger workers (64%).

Pension pot prospects

The research reveals that Scottish workers would like a retirement income of around £19,782 per year – marginally higher than workers in North East of England, Northern Ireland and Yorkshire & Humberside. Londoners’ came out top with aspirations of a £28,700 per year income from their pension pot.

But the majority of people won’t reach this level based on their current contribution levels.

The research shows that over half (52%) of Scottish workers don’t fully understand how much they need to save to reach an adequate pension pot – a figure that rises to 69% in Northern Ireland and North East England.

On average, Scottish workers are only saving 5% of their salary towards their retirement with average employer contributions just marginally higher at 6%. Crucially, the analysis found that workers’ contribution levels are not increasing with age. In addition, only 15% of those surveyed say that tax-free contributions are an incentive to save towards their pension.

For the pensions system to act as an incentive to save, PwC suggests it needs to simplified, use language people can relate to and include a broader package of measures than tax reform.

Alison FlemingAlison Fleming, head of pensions at PwC in Scotland (left), said: “Our research shows a real disconnect between people’s pension pot expectations and what they are putting into the system. In short, the majority simply aren’t contributing enough and more often than not this is down to a basic lack of understanding of the system.

“If we are to incentivise people to invest their hard earned money into their pension, then the system needs to not only be much simpler to understand but trustworthy and sustainable.”

PwC’s pensions’ team believes there are a number of routes that could simplify the current pensions regime so that it acts as a much-needed savings incentive. Options include:

·        Introducing a single rate of tax relief on pension contributions. This may also cause less disruption to pensions, as the system is being tweaked rather than completely overhauled.

·        Developing a system where people are taxed on the money they put into their pension, but they receive an up-front contribution from the Government and their pension would be tax-free in retirement.

Ms Fleming added: “What is clear is that tax reform on its own isn’t enough. There needs to be a greater emphasis on improving saver awareness, increasing auto-enrolment contribution levels and improving financial education so people can plan effectively for their retirement.

“The Financial Advice Market Review is an opportunity to make quality and affordable advice available for all and we believe technology should be at the core of the solution.”

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