If not pensions, then what?

New research from Barings has found that pensions are not considered a retirement funding source for 44% of Brits.

This means that 15.7 million people over the age of 18 who have not yet retired do not currently expect to use a pension to fund their retirement.

If they don’t plan to use a pension, how do they intend on funding their retirement?

Nearly one in six people expect to use an inheritance. Over one in ten plan to rely on the value held within their homes.

Both of these ‘strategies’ have the potential to succeed, but risk leaving you in poverty in retirement.

Relying on an expected inheritance places retirement planning outside of your direct control. With all of us living for longer on average, inheritances are likely to be lower in the future as more wealth is spent on long term care, leaving little for beneficiaries.

Accessing the equity in property often means downsizing to a smaller property in retirement. Once the mortgage has been repaid and expenses associated with moving have been settled, the capital available from downsizing can be relatively small.

The income that can be generated from this capital is also small in many of the cases we see.

Whilst pensions are not the only way to fund a retirement, they do play an important role.

The best retirement plans we see include a mixture of income sources; state, occupational and private pensions, investment portfolios, cash savings and other assets.

There is often an irrational fear of pensions, as some aspects of pensions have been subject to bad press over the past decade. In this environment of lower investment returns and lower annuity rates, pensions might not look as attractive today as they once did, despite the valuable tax reliefs still available.

What pensions do bring to retirement planning is discipline.

Unlike an ISA portfolio which can be accessed at any time, a pension is solely there to provide cash and income in retirement.

That so many people are avoiding pensions for retirement planning is a worrying indicator for the future wealth of the UK. It also suggests that many are facing a lot of pressure on their incomes, without the available disposable income to save for the future.

Photo credit: Flickr/Toban Black