How much will YOU retire on? Warning that inflation will leave fewer savers on the path to a ‘moderate’ income of £20,800 by next year
- 42.7 percent of households are on the way to a “moderate” income in old age
- However, according to a new projection, that figure will drop to 38.4 percent next year
- Do you want to prepare your pension for a decent retirement? Below is a to-do list
Fewer than two in five households will be on track to a decent retirement after rising inflation hits budgets in the coming year, a new study shows.
Currently, around 42.7 percent are on track to earn a “moderate” income in old age, but projections based on official savings data suggest that number will fall to 38.4 percent next year.
A single person needs a minimum income of £20,800 a year, while a couple needs £30,600 to achieve financial security, according to an influential industry measurement of living standards in retirement.
Rising bills: Less than two in five people will be on track to a decent retirement by next year, a new forecast says
These figures include the state pension, which is currently worth around £9,600 per person if you qualify for the full lump sum.
“Rising inflation means people have less money left over and are having to make tough decisions about how to use it,” says Hargreaves Lansdown, who runs a Savings and Resilience Barometer with forecasting firm Oxford Economics.
>>>You want to get your old-age provision off the ground? Below is a to-do list
The barometer found that around 71.9 per cent of households with an average household income above £102,800 per year meet the moderate income target as defined above.
However, Hargreaves notes that this may not be enough to meet their expectations as these are the top earners. Therefore, a sizeable cohort of wealthy people could become scarce in old age.
Meanwhile, it found that 11.7 per cent of the lowest income households, with an average income of £9,100 a year, are likely to meet the target.
“Saving for retirement through an annuity is an extremely important part of financial planning, but it needs to be balanced with your financial needs today,” said Helen Morrissey, Senior Pensions and Retirement Analyst at Hargreaves.
“The mechanism that makes annuities a good option for saving for retirement – keeping the money invested until at least age 55 – means that they cannot be used to meet short-term needs.
“This may work well most of the time, but when you’re faced with a cost-of-living crisis, like we’re doing right now, people are in a very difficult position.”
To show people what different earnings levels mean for them in reality in old age, the Pensions and Lifetime Savings Association created a measure that categorizes typical lifestyles into three groups – see below.
The results indicate how much shopping you can afford each week, where and how often you can vacation in a year, whether you can drive a car, and perhaps what you spend on clothes, shoes, gifts, and your home.
Morrissey says: “Automatic enrollment has put people’s retirement planning on the right track as millions more people participate in occupational pensions.
“However, as we can see, current contributions are not enough to cover a modest income in retirement – nearly 30 percent of the highest-income households are still not saving enough.
“This suggests that many have opted to stay close to minimum contribution rates rather than raise them further.
“Raising minimum contributions would encourage people to save more for their retirement, but the trade-off is to see what happens to their financial resilience today, especially for low earners.”
How much should people currently save for retirement?
As part of the automatic enrollment, employers must contribute at least 3 per cent of earnings between £6,240 and £50,270 to the staff pension. Government tax breaks offer an additional 1 percent.
Employees must contribute at least 4 percent on their own behalf, and if they choose not to, all of the above is lost.
Who Pays What: Automatic enrollment breakdown of minimum pension contributions for base taxpayers currently
According to a recent impact study by Hargreaves and Oxford Economics, people’s pension funds could suffer a 10 percent hit if they had to save more of their salary for a pension.
Workers who are under financial pressure are urged not to give up or cut pension contributions as it could hurt their future finances.
The Savings and Resilience Barometer is based on data from the Office for National Statistics’ Wealth and Wealth Survey – which draws its information from 10,000 households – as well as other data from official sources.
Hargreaves says it’s structured around five pillars of financial behavior — controlling your debt, protecting your family, saving for the bad times, planning for later in life, and investing to get more from your money.
This is how you get your pension on track
If you’re worried about your retirement and whether you’re going to have enough, here’s a complete 10-step guide to getting it sorted.
First, examine your existing pensions. Broadly speaking, you need to ask schemas the following:
– The current fund value
– The current transfer value – as a relocation penalty may apply
– Whether the pension is a final salary or a defined contribution system
– Whether there are any guarantees – for example a guaranteed annuity rate – and whether you would lose them if you moved the fund
– The pension projection at retirement age.
You can use a retirement calculator to see if you have enough – find This is Money’s here.
You should add the projected figures to what you expect for the state pension, which is currently £185.15 a week, or around £9,600 a year if you qualify for the full new rate.
Get a state pension forecast here.
If you’re tempted to pool your old pensions, here are some tips to help you decide.
If you have lost track of old pensions, the government’s free locator service is available to you.
Be careful when doing an online search for the pension locator as many companies with similar names will appear in the results.
These also offer to look up your pension but will try to charge or flog you for other services and could be fraudulent.
If you’re in your 20s, we have a special retirement guide here. Self-employed people can find out here how they can regulate their retirement provision.
Women, who tend to miss out due to lower wages and unpaid care work, can find out here how they can increase their pension provision.