Abstract
Abstract Rules of thumb (RoTs) are proposed as a means of promoting higher levels of Defined Contribution (DC) pension saving and to help stimulate debate about the high and uncertain cost of pension provision, leading to the development of solutions. The Lifetime Pension Contribution (LPC) tells young people what pension contribution is required over a full working life to achieve a decent retirement income, calculated as 23% of average UK earnings. Another RoT is that each 1% of earnings provides a pension of 1.5% of earnings. Other RoTs show how costs vary by retirement age and if the saverʼs retirement planning is on track. The current high cost of pensions is partly due to low interest rates and the inefficiencies of the DC market, with inadequate bulk purchasing power and risk sharing. RoTs might help encourage higher employer contributions, either through automatic enrolment or on a voluntary basis.
Highlights
We see a role for the provision of broad, generic guidance for those who do not engage with a more personalised approach. This is supported by the Pension Policy Institute (PPI) who note that people tend to manage their finances through shortcuts such as RoTs6, and are open to behaviour change when an intervention is relevant to their current circumstances, referred to as “teachable moments”
On the basis of a single Lifetime Pension Contribution (LPC) being adopted, we suggest £525 as being an approximate average of the Central and Annuity amounts with real earnings growth of 1.5% p.a. and assuming contributions commence at age 22, acknowledging that drawdown is a very popular alternative to annuitisation13
Since we are assuming real earnings growth of 1.5% p.a., this implies an investment return net of Average Weekly Earnings (AWE) and charges of only 0.4% p.a., a reflection of the current low interest rates
Summary
RoTs have been developed in New Zealand for helping consumers to decide how much income to draw from their DC funds in retirement. We have investigated how RoTs might be developed to support the RITs. Our analysis is aimed at a target audience described in the PLSA consultation, “In the many cases where people will only be relying on pension saving to achieve their target income, it will be possible to adopt and promote standard rules of thumb”. This excludes consumers for whom we envisage RoTs not being generally appropriate, namely (a) those on relatively low incomes who are likely to be heavily reliant on State pension plus any modest DC benefits built up through A/E and (b) those with more substantial financial means who can afford financial advice if required. Empowering: Does it use positive language that motivates action, rather than appearing condescending?
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
