Don't bank on a 2012 rescue act

Published on Friday 3 July 2009 20:28

MILLIONS of people will be offered a workplace retirement savings scheme for the first time in 2012 – but waiting until then to start saving could be very costly.

Personal accounts, the government's answer to the pension crisis, will be a big shake-up for both companies and employees. However, a real concern is the prospect of people sitting back until they are forced to save, especially when many will be feeling battered and bruised by the economic crisis.

Indeed, it is estimated that today about 500,000 people with access to a workplace pension scheme elect not to join it. Under government proposals, all employees over the age of 22 will be automatically enrolled into the pension scheme, if they earn more than 5,035 a year.

Employees who already have access to a company pension will be automatically enrolled into it, rather than enter a personal account.

With personal accounts, employees will contribute 4 per cent of their earnings, which will be topped up by employer contributions of 3 per cent, plus tax relief of 1 per cent. The government hopes that up to ten million employees will benefit from the new regime. But the concern is that anyone who has the opportunity to start saving now, but decides to defer until they are compelled to do so in 2012 will miss out.

For a 25-year-old, the cost of missing out could be as much as 175,000, according to Fidelity. It claimed that a 25-year-old who started saving 300 per month now could be sitting on a pension pot of about 901,000 when they reach 65. However, if they were to wait until 2012 before starting, the sum amassed by retirement age would be nearer 726,000 – a massive shortfall of 175,000.

Everyone aspires to a long and comfortable retirement; however, one of the major drawbacks of retirement is that your employer stops paying you. When you retire, even if you are fortunate enough to be debt-free, most of the monthly commitments you have now will still be there – council tax, utility bills, buildings and contents insurance, TV licence, running the car, groceries, nights out, holidays, medical expenses and many more that will have to be funded for the rest of your life from unearned income.

So the bottom line is that longer life expectancy may mean spending more time at work. In 1997, the Continuous Mortality Investigation (CMI) research suggested that by 2005 a 65-year old man could expect to live, on average, until he was 83 years and one month.

However by October 2005, lifespan estimates were raised and the same man can now look forward to living a further three and a half years, until he is 86 years and one month.

This pattern has resulted in some tough choices having to be considered, including increased taxation to fund more generous state pensions, people being encouraged or forced to save more and longer working lives. The reality is likely to be a combination of all of them.

&#149 Alasdair MacDougall is a financial services manager with Martin Aitken Financial Services.