A new research paper which highlights the rising risk of financial deprivation in later life underlines how important it is for individuals to prioritise pension planning.
The Pensions Policy Institute (PPI) reckons that fewer than one in 10 people can expect to achieve a comfortable standard of living, while nearly half of people will fail to meet a “personally acceptable” level of income in retirement. These are stark figures which underline the urgency of developing solutions for future generations. In its What is an adequate retirement income? paper, the PPI says that solutions include employers and employees making higher pension contributions, more years spent working or the state increasing the underpin of a higher state pension.
Securing a decent pension income while balancing day-to-day needs with future ones is particularly pertinent for younger people struggling to get onto the property ladder while forking out for rent and repaying student loans. It’s a big issue for women too because they are far more likely to suffer from pension poverty than men.
One of the culprits for the bleak outlook is the phasing out of defined-benefit schemes (DB), at least in the private sector. Previously, says the PPI, when the majority of people were in DB schemes the target retirement income, including state pension, was 66 per cent of working life income. That compares with a target of 45 to 48 per cent income from a default defined-contribution (DC) scheme plus state pension. And these days more people are paying rent and carrying debt into retirement. Plus living on an income alone can be tricky – if there is no access to other assets or capital savings, people will usually struggle when unexpected costs arise.
So how much is adequate? The Pensions and Lifetime Savings Association says that a dual-person household would require combined household funds of £480,000 in 2021 terms to secure a moderate standard of living, £1,380,000 to secure a comfortable standard of living outside London and £1,475,000 to secure the comfortable target in London. These pots would allow individuals to achieve working life income replacement rates – proportional income targets – which allow people to replicate working life living standards in retirement.
But no one can really afford to wait for a new pension deal to be forged as that could take decades. Ignoring your pension or assuming it’s on track is risky so do what you can! There are no guarantees with DC pension pots as stock market performance is not within your control, so pay in as much as you can to get the benefit of employer matched contributions and tax relief. Women in particular should ensure that if they go part-time or leave the workforce they continue to make payments into their employer's scheme or a stakeholder pension. Household income should be invested to build individual savings accounts (Isas) and pensions for both partners – not just the one who is earning.
Two other groups in particular need to pay special attention to how much they invest for their future and what they invest in – the young and the self-employed. Most people understand why they need to fund a pension, but often assume that auto-enrolment means they have done enough, although this is not the case, or that a low-risk option is sufficient. A study by investment platform interactive investor, Show Me My Money, found that more than a fifth of 18 to 34-year-olds have a low-risk pension. Given their time horizon, this does not make sense as they are cutting off their access to high returns.
Don’t assume that your costs will fall away to nothing when you stop working. They might even rise significantly as you fill your time travelling and holidaying. In addition, retirement income on its own often isn't enough as the PPI points out to cover unexpected costs. You will need to build up other (cash) savings too.