Pensions guru, Ros Altmann, has suggested that the government should introduce a £1 million lottery to encourage saving for retirement. Anyone who is putting money aside for their old age would be entered into a monthly lottery which could have a £1 million prize.
I think it’s a nice idea. As Altmann says:
“[A lottery] taps into the psyche of many people who probably want to feel that there may be something in it for them today, not just in some very distant future.”
Of course, if a saver was being wholly rational, the existence of such a prize should make little difference. The chance of winning the jackpot would be extremely small. However, the sad truth is that few of us are wholly rational. I think a lottery might persuade more people to save.
Save more
And as a nation, we certainly need to save more for our old age. Take a look at these statistics:
- The number of people over the age of 90 will treble over the next 20 years.
- The average cost of a care home is now £26,000 a year. The average stay is two years, but, of course, many people live longer than the average. That means many people will need to spend £100,000 on a care home in their old age.
- UK has the biggest ‘pensions gap’ in Europe. UK adults need to save £10,300 a year to close the gap, according to Aviva. The gap refers to the difference between the income needed for a comfortable retirement and the actual income people can currently expect.
I could cite another 50 gloomy stats if I wanted to but the simple message is clear. We’re not saving enough for our retirement and we need to put more aside. So, apart from the lottery proposal, are there any other ideas out there that could boost saving? Let’s look at some.....
Unlock the box!
When you save into a pension, you can’t get access to your money until you’re 55 at the earliest. That’s a good thing in some ways as it means you can’t fritter your pension away on an expensive holiday when you’re 40. The ‘lock box’ forces you to be prudent with your retirement savings.
Trouble is, I suspect the lock box puts lots of people off from saving for their retirement at all.
I think we need to allow savers to access their pension pots at a younger age. Or at least a portion of their pots anyway.
Education and advertising
I didn’t start thinking about saving for my retirement until I was in my 30s. It just wasn’t something I thought about. More fool me.
It’s really important that future generations start saving when they’re young, so they need to hear the message when they’re at school. Then it can be reinforced by advertising and communication from employers. Much more work needs to be done in this area.
Get property prices down
One reason why so many twentysomethings don’t save for their retirement is they’re focused on getting a deposit together for a property. Indeed many Brits are obsessed about property and see it as the main way to build financial security for the long-term.
In my view, we need to get property prices down so that it’s easier for first-time buyers to get on the property ladder. Hopefully, they’ll then have some spare cash to save for their retirement. Putting all your eggs in the property basket is risky. Especially if you only own one property.
Rebranding
Ros Altmann’s comments were in a report published by the CII called An age-old problem – developing solutions for funding retirement. In the report, she also suggested that pensions need an ‘image makeover.’
“The word ‘pension’ often has negative connotations nowadays. It conjures up the image of being old, which many people resist...we should abolish the word ‘pension’ for anything other than what the state pays people in their old age.”
It might be better to focus on ‘retirement saving.’ Maybe a private or occupational pension could be called a ‘retirement ISA.’
There’s also some evidence that many folk don’t really understand what ‘tax relief’ means. ‘Top-up money’ would be more understandable.
The perfect product
So with those thoughts in mind, here’s my stab at designing a product that would be more popular. It would be called a ‘retirement ISA.’
If you invested up to £2,000 in the ISA during a year, the government would fully match those contributions pound-for-pound. So the government ‘top-up money’ would double your retirement contribution to £4,000.
Any contributions between £2,000 and £7,000 would get a 30% top-up from the government. Contributions above £7,000 in a year would receive no top-up at all.
The issue of whether you’re a basic rate or a higher rate taxpayer would be irrelevant. Everyone would receive ‘top-up money’ at the same rate. You would also be allowed to access some of your pot from the age of 45.
I realise this scheme would be expensive. I’ve not done any figures myself. There would be some savings though as tax relief for higher earners would be reduced.
And anyway, my idea gives an idea of where we should be heading. A lottery is a good idea, but we need to be even more radical if we’re going to persuade people to save enough for their old age.
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