The Pensions Policy Institute has produced a report entitled ‘What is an adequate retirement income?’. It serves to complement other recent studies which have all suggested that a substantial portion of the UK population is likely to struggle to maintain their desired standard of living in retirement.
There are currently around 11 million people in the UK between age 50 and state retirement age. According to the PPI, only one million of these have sufficient provision to receive a ‘comfortable’ retirement income throughout their retirement. Only six million will receive an income that they would class as ‘personally acceptable’. Three million will not even achieve the Minimum Income Standard for an acceptable minimum standard of living as defined by the Joseph Rowntree Foundation.
The central example in the report is that of someone with median earnings, who is currently aged 55, intends to retire at 67 and has defined contribution pension savings. Assuming they don’t use their 25% tax free cash to provide additional income, the typical member of this group will enjoy a comfortable retirement until age 70, then a moderate standard of retirement until age 75, before exhausting their retirement savings entirely by age 78. Here, the report uses the definitions of comfortable and moderate retirement set by the Pensions and Lifetime Savings Association, which are £20,200 and £33,000 per annum respectively for a single person (rising to £24,100 and £36,300 respectively for anyone resident in London and the South-East).
To receive a moderate income, if living outside of London, total pension wealth of more than £400,000 is required for a single person. The pension pot needs to be worth more than £1 million (for a single person) or £1.5 million (for a couple) to enjoy a comfortable retirement in the capital.
The report then mentions a study by the Pensions Institute, which suggested that, for a median income earner to replicate their working-life living standards in retirement, they would need to contribute 16% of their earnings to a workplace pension, twice the current 8% minimum.
Furthermore, the average pension saver now takes more risk with their savings than was previously the case, with an increase in the popularity of drawdown and a decline in the number of annuity sales.
Today’s older generation are also much more likely to provide financial support to their relatives than was the case in previous years, further eroding the retirement savings of many people.
Certain groups are also identified in the report as having lower levels of private pension income than the UK average. These are:
- The self-employed (on track for 96% of the income enjoyed by the average member of the population)
- BAME groups (71%)
- Carers (71%)
- Women (59%)
- Disabled people (44%)
The PPI is also concerned about the impact of Covid-19, which has resulted in the number of redundancies amongst those aged 50 or over almost trebling in the space of 12 months. It suggests that many of the affected individuals will struggle to return to the labour market.
The report concludes by suggesting that some or all of the following will be necessary in the future:
- Increasing the level of individuals’ pension contributions (either throughout working life or at particular stages)
- Retiring at later ages
- Increasing the State Pension for everybody
Accepting that future pensioners will enjoy a less prosperous retirement than previous generations