Lack of savings a major threat to those nearing pension age, writes Jeff Salway
SCOTLAND’S “baby boomers” are heading for a financial crisis in retirement as the savings shortfall among those nearing their state pension age continues to widen.
Half of Scots aged between 49 and 68 are less optimistic about securing a financially comfortable retirement than they were five years ago, according to a report published today by BlackRock.
Yet they are saving less money than younger generations, the firm’s Investor Pulse Survey revealed, with large numbers unprepared for retirement.
The result for many will be an extended working life or a retirement less financially secure than they once hoped for.
Two-thirds of baby boomers in Scotland cite a comfortable retirement as their top financial priority. However, 40 per cent of those quizzed admitted they haven’t started to save for retirement even as it edges closer.
Low levels of savings mean that many will fall a long way short of the £27,386 annual retirement income than the average baby-boomer expects to receive.
The problem is exacerbated by what experts warn is an overly cautious approach to investing for retirement.
More than half of those aged 49 to 68 who are managing to save, hold most of their money in cash. Almost half are unwilling to take investment risks in a bid to boost their pension pot and 55 per cent don’t have any savings exposed to investment markets.
The survey also revealed that 47 per cent of Scottish baby-boomers see their cash savings as sufficient to fund their pension income. Yet returns on cash have been ravaged by inflation since interest rates plunged to 0.5 per cent almost exactly five years ago.
Tony Stenning, head of UK retail at BlackRock, said: “It may not feel like it but the effect of inflation today is in fact similar to the 1970s, and these findings suggest individuals may be underestimating the impact on their savings.
“There is a cost to being in cash that many just aren’t aware of. Inflationary pressures and record low interest rates could have a stark impact on hard-earned savings.”
But many people nearing retirement have been deterred from investing by negative publicity around pensions and the impact of the banking crisis, claimed Derek Stewart, managing partner at Sam Wealth in Glasgow.
“People are less likely to make contributions when they are being told pensions are poor value and expensively charged, despite all the improvements to the charging structures,” he said.
Those perceptions have overshadowed the benefits of savings into pensions, according to Stewart, who suggested the outlook for pension savers was brightening as charges fall and calls grow for annuity reform.
But as it stands, he warned, those not saving enough are in for a shock.
“Unless they are going to sell a business or inherit wealth then where will their retirement income come from? Depending on an inheritance might have worked in the past but with the cost of care in later years it might instead be spent on a nursing home,” he said.
So how should you be saving as retirement approaches? It’s a delicate balance, according to Stewart. On one hand there’s a need to “de-risk” towards retirement so your nest-egg isn’t wiped out by an untimely market downturn.
On the other hand there’s a risk of being too cautious when retirement is still a few years away and not investing in the riskier assets that generate investment growth.
“You need a portfolio that reflects your ability to take risk and one that is well diversified to cushion the effects of downturns in the market,” said Stewart. “This means being spread across different asset classes in a global manner and is the same approach you should consider in the run-up to retirement so you still get a reasonable return.”
Top of UK chartts
Scotland’s baby boomers may be falling behind younger generations when it comes to savings, but they’re still outstripping their counterparts south of the Border.
Savings levels among 49- to 68-year-olds in Scotland are above the UK average, BlackRock found, while they also have a greater proportion of their investment holdings in stocks and bonds (30 per cent) than those elsewhere in the UK (24 per cent).
Scots are more diligent when it comes to keeping an eye on their pension savings too, the research suggests, with more than half regularly reviewing their investments.
Financial advice also plays a bigger role north of the Border. But the survey found that just 23 per cent of baby boomers in Scotland seek professional financial advice, even though two-thirds claimed to take their financial planning seriously.
More than a quarter of Scots workers on minimum wage
More than one in four Scots has been paid just the minimum wage at some stage over the past five years, with many experiencing money worries as a result.
Almost half of Scots who have been paid no more than the minimum wage have been forced to seek financial assistance, according to a new report from Payplan.
It revealed that 10 per cent of Scots currently earn the minimum wage, set at £6.31 for workers aged 21 and over and £5.03 for those between 18 and 21. But 26 per cent of people north of the Border have at some point since 2009 earned no more than the minimum wage, the debt advice firm found.
Almost eight in ten who have been on the minimum wage said it wasn’t enough to live on, with the rate of increase failing to keep pace with inflation.
John Fairhurst, managing director of Payplan, said: “People come to us every day with serious debts they have racked up while scraping a living on lowest pay.
“The majority of these people have been anything but extravagant with their spending and still find themselves with big debts and unrelenting creditors on their backs.”