Pension warning: 5 million to have inadequate income in retirement – how to prepare & save | Personal Finance | Finance
Pension prospects for millions may be in doubt according to a new report by the Pensions Policy Institute, sponsored by the Centre for Ageing Better. The report, titled “What is an adequate retirement income?” estimated a quarter of people approaching retirement, the equivalent to five million people, are at risk of missing the income they need.
“The report calls for a new consensus on what adequacy means.
“As there are various measures of adequacy, the government needs to build a consensus between employers, industry, unions and individual stakeholders on what an adequate income in retirement is.
“Additionally, Ageing Better is calling on employers to match workplace pension contributions at a higher rate and for better support for groups at risk of financial insecurity.”
Anna Dixon, the Chief Executive of the Centre for Ageing Better, commented on the report’s results.
She said: “The low level of the state pension in the UK, at just 24 percent of the national average income, means people are unable to rely on the state pension to provide an adequate income in retirement.
“Many people don’t have enough pension savings to support a decent standard of living in retirement.
“Further action is needed to ensure millions of people approaching retirement and generations to follow do not find themselves without adequate income in later life.
“While auto-enrolment is boosting the number of people saving for retirement, it is not sufficient to secure financial security in later life. We are calling on the Government and employers to do more to support people to achieve a decent standard of living in retirement and to boost pension savings for those approaching retirement.”
In early June, Which? estimated the amount of income including, state pension, that people are likely to need in retirement.
This broke down as follows:
- “Luxury” retirement – £31,000 (pot size of £671,000 needed for annuity; £422,140 for drawdown)
- “Comfortable” retirement – £19,000 (pot size of £305,170 needed for annuity; £192,290 for drawdown)
- “Essential” retirement – £13,000 (pot size of £123,365 needed for annuity; £77,350 for drawdown)
- “Luxury” retirement – £41,000 (pot size of £757,000 for annuity; £442,020 for drawdown)
- “Comfortable” retirement – £26,000 (pot size of £265,420 for annuity; £154,700 for drawdown)
- “Essential” retirement – £18,000 (pot size of £47,325 for annuity; £28,810 for drawdown)
Becky O’Connor, the Head of Pensions and Savings at interactive investor, commented on these estimates and expanded on the variation involved.
She said: “These estimates are a useful guide for people to know the retirement that they are roughly on track for, given their current pension pot size. But the amount we should all aim for is very personal and at the end of the day, depends on circumstances and goals, such as whether you want to leave an inheritance.
“It’s important to think about the lifestyle you have now and how much you would like this to continue when you retire. If your income will be substantially lower, then unless your costs fall dramatically too, you will have to get used to a potential drop in living standards when you stop work.
“Living costs do tend to fall for retired people and these estimates also assume major expenses like housing costs are largely paid off. But bear in mind any costs you expect to continue into retirement that could eat away at your pot faster, such as housing costs, as well as whether you will need to continue to support adult children or leave them an inheritance, should be factored into your own personal calculation for what your retirement pot should be.
“The Which? drawdown estimates reduce the pot size to nothing after 20 years, which means if you lived to be older than 85, in these scenarios, you would become dependent on the state pension at that point.”
Becky concluded: “While the estimates suggest that someone on an average salary paying the auto-enrolment minimum of 8 percent throughout their working life who will also receive the state pension should just about be on track for a retirement somewhere between ‘essential’ and ‘comfortable’, it might still be a struggle to manage any unexpected high bills, such as property maintenance.
“Self-employed people will need to put more in themselves to achieve the same outcome, as they do not benefit from employer contributions.
“It’s also worth bearing in mind that if you are in a defined contribution scheme, as most now are, your pot size is subject to variations in stock market performance – those who retire during a downturn can find a substantial chunk of the pot they were expecting wiped out at the last minute and sometimes have to work longer to make up for it.
“According to the interactive investor Great British Retirement Survey 2020, one in four people had suffered life setbacks that had derailed their retirement plans, such as illness or divorce, with women and people with children the most likely to be affected by an unexpected event. While no one knows what the future holds, it’s sensible to factor in the odd setback is likely.
“Younger workers who want to boost their chances of retiring well could do themselves a big favour by investing in potentially higher growth assets earlier on as this will give them the best chance of higher returns over the years. A separate study by interactive investor, Show Me My Money, found that more than a fifth of 18 to 34-year olds have a low risk pension, and so are potentially missing out on higher returns.
“Increasing contributions above the auto-enrolment minimum will also put you in a better position later on. The auto-enrolment minimum of 8 percent is not guidance on the right amount – it’s the minimum and should arguably be at least 12 percent to account for the possibility of lower investment growth over the coming decades, as highlighted by the interactive investor and LCP report ‘Is 12 percent the new eight percent?’, published last month. Don’t forget contributions to workplace schemes include employer contributions and tax relief. Generous employer contributions can be a huge boost to your retirement outcome – something to bear in mind if looking for a new job.
“To know you can get by on less when you retire is comforting, but if you are able to build up a bigger pot so that you can have more options later in life, then it’s a good idea to do so.”