Flat-rate State Pension Could Encourage Young People to Save More

Jun 30, 2011
Carol Finch

Younger Workers Would Save More if the State Pension Was Clearer - Photo by jfg

A recent NAPF survey finds that younger people could be encouraged to save more for retirement if UK reforms make the state pension easier to understand.

A survey into retirement attitudes, conducted by Populus on behalf of the National Association of Pension Funds (NAPF), shows that some pension saving issues could be solved if reforms make the current system simpler and more transparent. The results, released on June 27, 2011, show that this could encourage younger people to take a more active role in building retirement funds.

Why Don't Many Young People Save for Retirement Now?

The state pension system in the UK is currently composed of three possible elements (the basic and second state pensions and pension credits). This makes it difficult to understand exactly how much an individual will be paid, especially at a younger working age.

According to Joanne Segars, Chief Executive of the NAPF (State pension overhaul could transform young people's attitudes towards saving, NAPF, June 27, 2011): “The current system is a dog’s breakfast and makes it impossible for people to plan their future. Even pensions experts struggle to work out what they’ll get, so what hope does Joe Public have?”

How Could Pension Reforms Change Attitudes Towards Retirement Savings?

Reforms could simplify the system and make it easier to understand how much an individual would be paid. For example, the projected move to a flat-rate payment would give a worker at any age a far clearer idea of how much the state would ultimately contribute towards retirement income.

This could technically motivate some to save earlier and to build a bigger pension pot that closer matches their aspirations and needs. According to this study, this would have a particularly significant affect on younger age groups, many of whom currently fail to start retirement savings early enough.

How Would State Pension Changes Affect Saving in Younger People?

Projected pension reforms are being made for various reasons, one of which is to encourage people to take an active role in saving for later life. In a report in The Guardian ("Single-tier state pension 'will benefit poorer retirees", Jill Insley, June 28, 2011) a spokesperson for the Department of Work and Pensions said that moving to a universal flat rate payment would give workers: "clear incentives to save and certainty and clarity over what their state pension will be worth when they retire.

The survey clearly shows that young people often find the current system a barrier to saving – 63% of the 18-24s and 70% of the 25-34s stated that not knowing how much their state pension may be makes it hard to plan for retirement. However, almost half of those polled in these age groups (48% and 47% respectively) would increase contributions if they knew how much the state would chip in. Money is not necessarily the issue here. The 18-24s could afford to save an average of £41.06 and the 25-34s £47.96 extra each month.

By the time an individual reaches an age where a state pension forecast may show true value under the current system, it is often too costly to make up shortfalls. This leaves many forced to work for longer or to accept a lower income than they ideally need. If reforms could make it easier for people to get motivated to save, this could be a big plus point for their incomes in later life.