Bleak warning for the young

Young people were given a bleak warning by the TUC at the weekend: start saving soon or you will face poverty in retirement.

The TUC found that only just over a quarter of men aged 18 to 24 and only one-third of women have a pension, and it urged them to get one as soon as possible. You need to save at least 11% of earnings from the age of 25 to get a decent retirement income, rising to 14% if you put it off until 30 and 18% if you delay until 35.

However, the problem is not that young people are ignorant of the need to start saving for retirement - the question "How much do I need to save?" is probably second only to "Where are house prices heading?" in the world of personal finance.

The real problem is that saving 11% of earnings is simply not affordable when you are struggling to pay off student loans, clear credit card debts, and, if you have anything left over after the rent, save a small amount towards a deposit on a vastly overpriced basement flat.

That is why company contributions are so important: while a 25-year-old might take fright at paying 11% of earnings into a pension, saving half of that amount while his or her employer puts in the rest is much more affordable. I certainly waited until I was eligible for a company scheme before starting a pension because I did not feel I could go it alone.

However, 56% of workers in the private sector are not as lucky as me and are not covered by a pension scheme, up from 44% in 1996.

This is where Lord Turner's Pensions Commission comes in. Turner was asked by the government to investigate Britain's pensions crisis and today he unveiled his final thoughts on the subject. He proposed a combination of a higher basic state pension, working longer and saving more.

One of the key elements of his proposed reforms is the National Pension Saving Scheme (NPSS), which would force companies that do not already offer a decent retirement package to contribute on behalf of their staff.

Workers would be automatically enrolled to the NPSS, with the right to opt out. Companies would be forced to contribute 3% of an employee's earnings, as long as he or she remained enrolled, while workers would pay in a further 4% and tax relief would contribute another 1% - a total of 8%. This would be a minimum, with employees able to pay in more if they wished.

Companies argue that wages would have to be cut to offset their compulsory contributions. However, many workers already accept that they have to make a choice between a bigger pay rise and larger pension contributions and this is being reflected in wage settlements up and down the country.

Employers also complain that the costs of such a scheme would be too high, especially for small businesses. Turner admitted that the NPSS could add as much as 1% to the labour costs of a firm with fewer than four people. However, he also pointed out that it might cost the government £500m to subsidise the pension contributions of smaller firms and this could be funded by reductions in contracted out rebates.

We will now have to wait and see whether the government will help employers give younger workers the lifeline that so many need.

Comments

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The great thing about the NPSS is that it is so low charge. The big issues for most pensions schemes is that the charges eat significantly into fund performance over the long term.

Bear in mind that Stakeholder was run at 1% AMC, while NPSS is aiming to be run at 0.3% AMC. With the compounding effect of charges, this will have a huge impact.

Predictably, the ABI and NAPF said this couldn't be done at such a low AMC. However, Xafinity - a pensions company - says it can be done at 0.3% through their subsidiary Paymaster, which used to be the Paymaster General.

Since the feasibility of it has now been established, this raises the possibility of a viable, genuinely low cost pension scheme. This can only be a good thing at a time when the Government is struggling to come up with solutions to the current pensions crisis.