PLSA IC 19: ‘Extraordinary’ decade of low growth will make it 'impossible’ for savers

The current generation of savers will find it “virtually impossible” to save enough for a decent income in retirement following a poor decade of growth, the Institute for Fiscal Studies (IFS) director, Paul Johnson, has warned.

Speaking at the annual Pensions and Lifetime Savings Association (PLSA) Investment Conference, Johnson said that low growth and low interest rates mean that savers will have to save a “huge amount” to get the sort of incomes in retirement of previous generations.

The last decade has seen growth of 0.6 per cent, compared to an average of 2 per cent for the previous 40 years, making it the “worse decade of growth in history”, according to Johnson.

“When you are thinking of investment, the big question is, is this the new normal or is it going to change. Underlying all this is the extremely low interest rates and probably therefore low returns on many things and probably for a long period to come.

“That means of course, for the current generation of savers have to save a huge amount more than the previous generations in order to make the sorts of returns and incomes in retirement than they did in the past.

“If you look at the safe return, it is essentially impossible to save enough to have a decent income in retirement, if things carry on as they have been for example investing in safe assets.”

Current interest rates are set at 0.75 per cent, compared to 5 per cent in 2008.

According to the IFS, current gross domestic product is 14 per cent lower that it was forecast in 2008, amounting to a gap of £400bn, that figure is expected to grow to 20 per cent by 2022/23.

Johnson added that poor growth has been driven by flatlining productivity rates.

Furthermore, Brexit is likely to add to the uncertainty surrounding growth and that the current deal on the table would leave the country 4 per cent worse off than we would be if we stayed in the European Union.

Johnson said that we simply “don’t know” what effect a no-deal Brexit would have on the economy, as the Office for Budget Responsibility is unable to develop a model on what that might look like.

Despite this, he said that everybody could be affected by a rise in taxes in the likelihood the government will have to raise money following a rocky Brexit conclusion, in particular current “wealthy” pensioners.

“I think there are places in the pension payment system where we have a relatively wealthy generation of people at pension age at the moment, who pay no national insurance on their defined benefit occupational pension, having paid non on the way in either, which is very generous.”

Chancellor Philip Hammond is set to deliver the Spring Statement on Wednesday 13 March.

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