The Ticking Pensions Time Bomb
Andy Smith - Forest of Dean
Introduction
The latest Scottish Widows Retirement Report paints a stark picture of the current pensions landscape.
In this article we’ll take a closer look at the findings and set out some actions that people can take to improved their retirement prospects.
Retirement Lifestyle
According to the report, around 38% of people surveyed are on course for a retirement lifestyle that is below the minimum lifestyle as benchmarked against the Pensions & Lifetime Savings Association’s (PLSA) retirement living standards.
The PLSA’s retirement living standards sets out an amount of income an individual or couple might need in retirement to live a minimum, moderate or comfortable retirement.
According to the Scottish Widows report, around 32% of people surveyed are on course for a comfortable lifestyle, 7% are on course for a moderate lifestyle and 23% are on course for a minimum lifestyle.
Q. Having looked at the above table, what level of income do you think you are on track to receive?
It is worth taking into account the assumptions that underpin the PLSA’s lifestyle definitions.
Q. Do these reflect your expectations in retirement?
The PLSA’s lifestyle definitions include the following:
Minimum
This is the level of income designed to cover all your needs with some left over for fun including:
£95 per week for food.
£30 per month on takeaways.
No car.
A week’s holiday in the UK per annum.
Moderate
This allows for more financial security and flexibility including:
£100 per week on food.
£20 per week on takeaways.
Three year old car replaced every seven years.
Two weeks 3*all-inclusive holiday in the Med and a long weekend in the UK.
Comfortable
This provides for more financial freedom and some luxuries including:
£130 per week on food.
£30 per week on takeaways.
Three year old car replaced every five years.
Two weeks 4* all-inclusive holiday in the Med and three long weekend breaks in the UK.
Why is Retirement Planning so Difficult?
There have been a number of key trends over the last several years that have made it difficult for people to adequately plan for their retirement. These include:
The fall in the number of people who are members of an employer’s Defined Benefit Pension Scheme. This means that individuals are responsible for saving for their own retirement ensuring that they contribute enough and make the right investment choices.
People are living longer and so the amount of capital someone has saved for their retirement has to provide an income for longer.
Many people rely on the state pension to provide a large part of their overall pension provision and the state pension age has increased so that it will be age 68 in 2046.
Over recent years, the cost of living crisis has meant that more and more people are saving less for their retirement. According to the Scottish Widows Retirement Report, only 42% of people prioritise long-term saving beyond saving for rainy day expenses.
Added to this is the fact that many people will still have mortgages that have an end date in retirement meaning that their housing costs will be higher for longer. Those who expect to rent in retirement will face increased rental costs throughout their retirement.
Financial Clarity
There is a distinct lack of clarity for those people who are saving for their retirement with almost 1 in 3 people not knowing how much income they will need in retirement.
For those who have considered how much income they need in retirement the vast majority of people will under-estimate how much they will actually need in retirement.
Even more worrying is that 50% of people in their 50’s and 60’s have done little to no research on how much they might need to save for their retirement.
Trends Among Different Communities
Scottish Widows have mapped out the experiences and outcomes of different groups and communities across the UK when it comes to retirement expectations and certain themes have emerged.
Ethnicity
Optimism regarding retirement varies between different ethnic communities with those from the Indian community more optimistic about their retirement prospects.
Disability
The report finds that disability is strongly associated with a less enjoyable retirement and those with a disability are forecast to have less income and face higher costs in retirement.
LGBTQ+
According to the report the LGBTQ+ community is much less likely to be on track in terms of retirement planning due to having low or unreliable income. In addition those in the LGBTQ+ community are much more likely to cite being intimidated or uncertain how to access potential avenues of support like financial advice.
What Can Be Done?
For those concerned about their retirement planning there are a number of things that they should consider:
Work out your income and expenditure and whether there is any scope, however small, to make pension contributions. The earlier you start the better.
Where possible, join your employer’s workplace pension. This will mean that you receive an employer’s pension contribution.
Map out your career history to date and identify whether you contributed to a pension during that time. Many people have pensions from previous employments that they have forgotten about.
Obtain a state pension forecast using the government gateway and work out whether you are on track for the full state pension.
Request projections from your pension provider of the likely benefits you might receive at retirement. Are these in line with what you think you might need in retirement?
Financial Planning
For those who want more help with their retirement planning, work with a well-qualified independent financial planner who can help you to review your current financial position, identify the lifestyle you want in retirement and put in place a financial plan to help you to achieve this.
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