How to solve the pensions gap?

It is no secret that the UK faces a pension crisis. Millions of Britons under the age of 50 are not saving enough and will struggle to live comfortably in retirement.

It is a problem that affects Bristol and the South West just as much as any other region. Almost a quarter of households in the South West are saving nothing at all, according to research carried out by the think tank Centre for Economics and Business Research for the newly published Brewin Dolphin Family Wealth Report.

The research highlights a huge gulf between retirement expectations and reality. The average 18 to 44-year-old in the South West regards an income of £27,000 a year as sufficient to afford them a comfortable lifestyle in retirement. Around £8,000 of that would come from the State pension and £19,000 from a personal pension. They would need a pension pot of £658,000 to buy an annuity at prevailing rates to provide that income. However, the average expected size of this age group’s pension pot is just £152,000, a massive shortfall of £506,000.

To secure £27,000 a year of income in retirement, an 18-year old would need to contribute £397 a month to a pension at today’s prices, adjusted for inflation. On the same basis, a 30-year old would need to save £720 per month and a 44-year old £1,670 a month. Please bear in mind that this is an illustration only and the value of a pension can fall as well as rise and you may get back less than you invested.

Saving that much is a tall order for many, though not, as some suggest, because the under-50s are too busy spending their money on holidays, entertainment and “living for today”. Younger generations want to save more for retirement and a good pension income is one of their most important financial goals.

However, rising living costs, low interest rates and the battle to get on the housing ladder mean they don’t have enough spare cash to save. Simply telling younger people to invest more of their income isn’t going to work.

That is why Brewin Dolphin is calling on older people to fundamentally rethink how and when they pass on wealth to younger relatives. If they can afford it, older people should reconsider the long-established practice of gifting assets to younger generations in their wills. Instead they should look to make regular financial contributions to their children and grandchildren while they are alive.

Making regular contributions to a grandchild’s Junior ISA or pension could transform their future financial position. Gifting wealth while you are still alive can also save inheritance tax (IHT). If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for IHT.

The potential long-term investment growth, the effect of compounding and the IHT savings means that one “silver pound” gifted and invested today could be worth three times as much to grandchildren later on.

Older people may be worried about passing on wealth while they are alive because they do not know whether they will need it in the future. However, with careful planning such concerns can be allayed, giving clarity about how much you can afford to give away and the confidence to help your children and grandchildren now.  As a solution to the pension crisis, making regular lifetime gifts is a win-win solution for all the family.

Tom Miller is divisional director of financial planning at Brewin Dolphin’s Bristol office.