Family Fortunes

1
Family Fortunes

• Deborah Cooper
• Ageing Population Conference
• January 2002

2
The message

• Retirement costs more
• People need to save more
• People need to save more now
• State as of right pension is declining
• Occupational provision declining
• Responsible savers do it for themselves

3
The medium

• As of right state benefits
• Means tested state benefits
• Occupational pensions
• Personal/stakeholder pensions
• Other saving
• Other expenditure

4
The challenge

• How should a household plan for retirement?
• Is a contribution of 17.5 earnings enough?
• Is a replacement rate of 2/3rds earnings enough?
• It depends ...

5
It depends on

• On the household
• how many adults
• how many dependents
• household income
• breaks from work
• access to occupational pension scheme
• whether they want to buy their house
• when they want to retire
• what they want to retire on
• how long they live

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and it depends on ...

• Investment returns
• Increases in prices and earnings
• Tax rates
• Tax regimes
• Annuity costs
• Expenses
• How all these affect the particular household

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Household 1

• Income 40,000
• Start saving age 25
• Both in work
• Buy house age 30
• 2 children
• No breaks
• One DB occupational scheme

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Household 1

• This household needs to save.
• Note that mortgage is about 10 of salary.
• 5 of saving is the member contribution.
• So whilst the children are at home there is no
  additional saving.
• It achieves/needs a replacement rate of 80.

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Household 1
10
Household 1
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Household 2

• Income 40,000
• Start saving age 25
• Both in work
• Buy house age 30
• 2 children
• 15 year break
• One DB occupational scheme

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Household 2

• This household needs to save some of the time.
• Note that mortgage is about 10 of salary.
• 5 of saving is the member contribution.
• So during the break from work there is no
  voluntary saving.
• Saving after age 65 because of outstanding
  mortgage
• It achieves/needs a replacement rate of 70.

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Household 2
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Household 2
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What if ?

• Investment yields increase
• in isolation a good thing
• but Household 2 heavily dependant on borrowing -
  so could be a bad thing
• No Occupational Pension Scheme
• standard of living falls
• saving over 30 except between 33 and 46 and
  after 65
• Retire early
• standard of living falls

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So what?

• Save lots now is not the most helpful message
• Mistaken to impose saving on majority of families
• Investments and mortgages need to be flexible
• Risks to the strategy