Close to half of over-40s admit they are unlikely to have saved enough for a comfortable retirement according to “alarming” data – with experts saying a two-pronged “crisis” is coming.
Survey data from 4,750 UK savers aged 40 or over, collated by wealth manager Netwealth, suggests that 41 per cent say they won’t have enough saved for a comfortable retirement, for which they estimate to need around £430,000.
The Pension and Lifetime Savings Association suggests that a single person needs an income of around £37,300 per year to enjoy a comfortable retirement, which involves “more financial freedom and some luxuries”.
People enjoying this sort of retirement might be able to have a two-year old car replaced every five years and three weeks’ worth of holidays in Europe every year, but Netwealth’s figures suggest many may not be on track for this.
Its research also shows that 45 per cent have not calculated the cost of their retirement.
The organisation’s CEO, Charlotte Ransom, has said that in a “challenging” economic environment, the “risk of not being able to afford the type of retirement that you expect is greater than ever”.
“The alarming reality that nearly half of respondents, who are aged 40 and over, haven’t even considered what they will need in retirement is of huge concern.”
Is a retirement ‘crisis’ coming?
Former pensions minister Sir Steve Webb has told i that there are two main strands to what may be termed a “retirement crisis.”
He said that we expect to see fewer people retiring with any defined benefit (DB) pensions – which guarantee a fixed income each year in retirement – and that those who do have DB pensions will have “progressively smaller amounts”.
This type of pension is more generous than the more common defined contribution (DC) scheme – where savers deposit money each month and then have the responsibility of making sure this lasts the length of their retirement – but fewer private employers are now offering them, because they are so costly.
And Sir Steve, now a partner at pension consultants LCP, has dubbed this downward slope in DB incomes “the ski slope of doom”.
He has said the first coming problem is for those who have no DB pension, but also have small DC pensions, particularly as automatic enrolment – rules that mean employers have to enrol employees into a pension scheme and pay into it by default – and have only been around since 2012, meaning that many may have had years of not paying into a pension scheme.
Sir Steve terms this the “DB tide going out before the DC cavalry comes over the hill”. He has then said the next wave will come when a larger proportion of people have to pay their rent or mortgage in retirement in the future.
“To be blunt, having to fund a rent is catastrophic for your standard of living in retirement,” he said.
What to do to ensure you have enough in your pension at retirement
“The success of auto enrolment has been coverage – more and more people have some form of pension – but the issue is they’re not saving enough” explains Paul Leandro, a partner at UK professional services consultancy Barnett Wadingham.
“More needs to be done to get total contributions more in the 12-15 per cent range,” says Sir Steve.
In the meantime though, here’s what you can personally do in order to try and ensure you have enough income in retirement:
Up contributions if and when you can
If your employer gives a contribution of 3 per cent, you’d need to contribute 9 per cent personally, in order to get your contributions to 12 per cent.
Alice Guy, head of pensions and savings at interactive investor, has said: “For younger pension savers, it might seem daunting thinking about upping your pension contributions, especially with interest rates and rental prices increasing.
But it’s worth bearing your pension in mind, even if you can’t afford extra contributions now. Think about upping your contributions if you get a pay rise in the future.”
Increases can really boost your retirement savings
If you were to pay an £350 more into your pension for 27 years, this could leave you with extra pension savings worth £170,135. This should give you an extra income of £583 a month until age 99, according to an online pension calculator from provider PensionBee.
To achieve this amount over 17 years, you’d need to save an extra £600 a month. In seven years, it’s £1,550 a month.
Check how your money is invested
How much your money grows by is just as important – if not more – than how much you add into the pot. As pensions provider Scottish Widows explains: “The more risk you take the more your pension pot may grow – or fall – in value.”
It may be worth moving your pension into different funds depending on the growth – “the general thought process is you may want higher yield returns in the earlier years of your saving”, explains Mr Leandro. But you should seek financial advice before making decisions you’re unsure about.
New employer? Check what pension scheme they offer
Although 3 per cent is the minimum employers must contribute to your pension, it’s worth negotiating or checking what a new employer offers before you start a role. “Some employers pay in a lot more than others,” explains Alice Guy.
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