The Journey to Retirement Security: Understanding the Savings Gap
Planning for retirement is crucial, but many people face a significant gap between what they have saved and what they will need to sustain retirement. This gap, known as the retirement savings gap, poses a huge challenge for employees in achieving future financial security. In this blog post, we'll explore why the gap exists and look at ways to bridge it for a happier, financially secure retirement.
What is the Retirement Savings Gap?
The retirement savings gap is the difference between the savings people have and the amount they need for a desired retirement lifestyle. There are many factors affecting the savings gap, but it mainly comes down to people not having the means or the knowledge to contribute enough money into their retirement pot.
Some people, whether this is down to the likes of gender, age or location, are more likely to be impacted. For example, research has shown that women face the largest pensions gap, saving 40.3% less on average into their pensions than men.
Another study shone a light on regional imbalances in the UK when it comes to retirement savings, with workers in Greater London and the East reporting to have 40% more in retirement savings on average compared to the North and the Midlands.
It’s clear that many people aren’t saving enough for retirement, and they need to receive adequate support and education to equip them to do so.
Reasons Behind the Gap:
Longer lifespans = more years in retirement.
Not saving enough/cost of living.
Lack of financial knowledge.
Changes in retirement systems and pensions.
Ill health/long-term care costs.
Career breaks.
Pay disparity.
Implications of the Retirement Savings Gap:
Dependence on government programs.
Future financial stress.
Reduced quality of life.
Limited options and delayed retirement.
Bridging the Retirement Savings Gap:
Start early – time is money.
Set realistic goals with a retirement savings plan.
Make use of additional, tax-efficient retirement benefits where possible.
Access financial education and retirement planning tools.
Although the Government has made attempts to tackle the issue through the likes of auto-enrolment and a higher pension age, challenges still exist. There’s a growing need for employers to support their workforces with accessing the above tools and resources to protect their financial wellbeing now, and in the future.
With regards to disparities in gender for example, employers must assess pay inequalities by adopting fair pay practices/pay transparency and workplace flexibility, so women are in a position to contribute more towards their future financial security.
The LGPS and Shared Cost AVCs: Closing the Gap
During such a challenging financial climate, employees need the best possible savings opportunities to ensure they can retire with enough funds. When we’re talking about closing the retirement savings gap, the Shared Cost Additional Voluntary Contribution (Shared Cost AVC) scheme is a crucial addition to any public sector benefits package.
Members of the Local Government Pension Scheme (LGPS) are entitled to this benefit so they can boost their retirement pot by saving on Income Tax and National Insurance on their contributions, but they need their employer to give them access.
Shared Cost AVCs allow LGPS employers to:
Provide a cost-efficient and flexible saving method for their employees - AVC contributions are exempt from Income Tax and NIC.
Give their staff the chance to fully understand the benefits of their pension scheme and how best to grow their retirement savings with educational webinars.
Allow their staff access to financial planning tools such as calculators or 1-to-1 meetings with retirement experts.
Create valuable organisational savings through National Insurance exemptions on employee contributions.
Having the ability to support the future financial security of the workforce and simultaneously save money really is a win, win for employers.
Closing the retirement savings gap is a challenge, but it's possible with the right approach. Employers must encourage their staff to start early, set goals to maximise employee pension engagement and invest in effective financial education for the workforce. But to address the gap at its core, inequalities in pay must also be addressed.
Where possible, employers should consider innovative solutions (like Shared Cost AVCs in local government) to enhance employee savings potential and boost financial wellbeing. By making small but proactive steps, workers can be empowered to create a more secure financial future.