A question that often asked is, ‘Are you putting enough into your pension for your retirement?’ The answer for the vast majority of people in the UK tends to be ‘no’.
The reason why the answer is not in the affirmative is there’s an expectation that retirement will occur at a fixed pre-determined age and that pension savings are the sole source of retirement income.
We all know that if an objective is not achievable many will simply give up. In a way, we have to ask is this the problem for pension savings? Are we dealing with unachievable outcomes such that the individual concerned feels they may as well give up rather than try to reach the goal of saving enough for retirement? Perhaps so.
Firstly, let’s consider the mindset when looking at retirement – even in today’s world where it’s likely we’ll be working for longer, nearly all of us expect to retire at some time. The question is when will we be able to afford to do so? To answer that question we need to understand how much income will be required in retirement.
In the first instance, it’s necessary to understand that spending in retirement is nothing like spending while working.
For instance, there will be no commuting costs; on the other hand, there will be more leisure time in which it is easy to spend more on leisure activities. During the winter, the house may need heating all day, every day, instead of just when the occupants are not at work. Until you have begun to experience your retirement you won’t know what the difference for any particular individual will be.
Until you have begun to experience your retirement you won’t know what the difference for any particular individual will be.
There are, however, some general guides available to help the individual, from work carried out by the Pensions Commission and the Department for Work and Pensions, on target household replacement incomes in retirement. These are reproduced below.
Income bands (gross earnings) and replacement rate targets
| Original 2004 pension Commission income band | Income band in 2012 earnings terms* recalculated by DWP | Target replacement rate |
| Up to £9,500 | Up to £12,000 |
80%
|
| £9,500-£17,500 | £12,000-£22,100 |
70%
|
| £17,500-£25,000 | £22,100-£31,600 |
67%
|
| £25,000-£40,000 | £31,600-£50,500 |
60%
|
| Over £40,000 | Over £50,500 |
50%
|
*To get to today’s equivalents, 2012 earnings have increased on average by 4.6% although there may be variations in different earnings bands
It is, therefore, possible to project current pension savings and deduct the state pension to arrive at an age at which an individual can expect to be able to afford to retire based on their current pension savings.
Unfortunately, for many the answer may be just as unpalatable as the one offered to, ‘Are you putting enough into your pension for retirement?’
But, at the very least, we do have a starting point we can begin to work with.
So, what about couples in retirement? There is an old saying that, ‘two can live as cheaply as one’. Well, that is not quite right. On average, a couple require 50% more income than a single person for the same standard of living.
If the individual is living in a couple we can combine two incomes but only having to target two-thirds of the replacement income. Also, there is the potential for two state pensions.
Which could mean that for those individuals within a couple, the age at which they can retire will in many cases become more palatable, especially for women who may not have had the chance to accumulate as much in their pension savings.
Many people will, of course, have savings in addition to their pension savings. If these are significant a proportion of these can be included in the calculations. Similarly, many have housing wealth of much more than their pension savings. By including a proportion of the value of their house, say 25%, the answer starts to become even more palatable.
The important point for advisers is that by going through this process a client has been introduced to the following concepts:
- Retirement spending will not be the same as their spending while working
- The age at which they can afford to retire will be determined by their savings
- If they are in a couple, two will need less to live off
- Other wealth, including housing wealth, can be used to meet their retirement income objectives
For many, having gone through this process the outcome could well be that their retirement objectives are attainable and worth saving for.
It is for this reason that I would argue for the introduction of a retirement savings dashboard that helps to educate people that a worthwhile retirement is achievable rather than just a pension dashboard which would in fact simply turn many off continuing to save for their retirement.
Bob Champion is chairman at Later Life Academy
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