The Lowdown Hub

The time to save for your pension is in your 50s, not in hard-up youth

We are told some things so often that they seem like common sense. To be accepted, not to be questioned. Take pensions. For years it was the received wisdom that we weren’t saving enough for them. That we should start early, put in as much as possible, and as young as possible to benefit from the magic of compound interest. That women put far less into their pensions than men.

Ever since I can remember — and that stretches back to the 1980s — I’ve read regular dire warnings about the lack of pension savings to secure retirement incomes. These stories still appear with monotonous regularity. The reality? Look at the present generation of pensioners. They are significantly better off on average than they were through most of their working lives.

Before I get a shedload of complaints, I emphasize the “on average”. It is not true of everyone. But it is true of most. Once you account for the fact that most pensioners don’t have to pay for a mortgage and don’t have children to provide for, they have a higher disposable income than they had when they were in their thirties and forties. That means they saved too much. They would have been better off doing less scrimping and saving when they were younger and instead of enjoying more family holidays, meals out or perhaps buying more furniture.

I raise the furniture point because it came up in conversation with a friend of mine. Now a senior civil servant, he was reminiscing the other day about how, when he and his wife were in their early twenties, they were sleeping on a mattress on the floor for a while. They couldn’t afford a bed. Both were fortunate enough to work in sectors where they were members of old-style defined-benefit occupational pension schemes. Something like 20 per cent of their salaries were being contributed to a pension at a time when they couldn’t afford a bed. They will have more money in retirement than they know what to do with. They would have been better off taking the money when they were young and enjoying a slightly less substantial pension.

They are the lucky ones. Generous pension schemes are now rare outside the public sector. That risks under-saving and certainly risks unrealistic expectations among the young when they look at the experience of their parents’ generation. Yet, despite dire warnings, the issue is not about what they are saving in their twenties and thirties. The standard life cycle is such that many of us aren’t too well off when we start work and while we are paying off the mortgage and raising kids. But when, perhaps by our early fifties, most of those costs are gone, we suddenly have some spare cash. That’s the time to save.

Modelling by my colleagues at the Institute for Fiscal Studies suggests that a typical graduate with a couple of children should do at least two thirds of their pension saving after the age of 45.

There are risks to that strategy, of course. If you become ill or lose your job in your fifties you might regret that lack of saving earlier on. The government doesn’t help here. Anyone of my generation banking on sticking a lot of money in a pension in their fifties might have been stymied by sharp reductions in limits on what can be saved. They might have been better off scrimping to put more in when they were younger. Given all the risks and uncertainties we face as we look forward to retirement, it would, to say the least, be helpful if governments didn’t exacerbate them. Indeed, surely it is their role to help to insure and mitigate such risks.

The fact remains that, for most, a bump-up in pension savings as the mortgage is paid off, as the children leave home and, for younger generations, student loan repayments come to an end would be optimal.

There’s a policy opportunity for government here. Auto-enrolment into pensions has been a great success. However, minimum contribution rates are the same for all. Rates rising with age, or rising when student loans end or children reach 18, would work better. For most people, the government knows when these events happen. This would be particularly easy and valuable for the generation of graduates with student loans. They need notice no change in their income as loan repayments are automatically translated in pension contributions.

I hope that all makes some sort of sense. What about my third pensions myth, though, that women put less into pensions than men? It’s not really a myth. Women spend less time in the labour market and earn less on average than men, especially after having children, and so the total value of their contributions is lower. But in the era before auto enrolment, as a proportion of their earnings, across all employees, women of all ages actually contributed more each year than men. Why? Because women are much more likely than men to work in the public sector, where pensions are incomparably more generous than those available in the private sector. In fact, something like two-thirds of public sector workers are women. As these schemes have moved from a final-salary to an average-salary basis, they also have become relatively less generous to men and more generous to women.

One result is that increasingly the survivors’ benefits built into these schemes, originally conceived as providing for the widows of men with good pensions, will be received by the widowers of women with good pensions.

As ever in pensions, perception lags well behind reality. Past performance, as they say, is not necessarily a good guide to the future.

Paul Johnson is director of the Institute for Fiscal Studies. Follow him on