The tracker rose over the second quarter (April to June) of 2022. This suggests, somewhat surprisingly, that the expected future living standard in retirement provided by DC savings was higher than at the end of the previous quarter. |
As usual, this overall increase masks a more complex picture – and one particularly driven by expected returns rather than the reality of current markets. Aon DC Tracker Savers’ Positions
Looking at the actual returns over the period and ignoring future return changes, the DC Tracker fell from 61.3 to 58.1. However, as with the last quarter, this fall which was due to actual returns over the period, was more than offset by an increase in the future expected returns on savings. When we allow for these higher but uncertain future returns, the DC Tracker rises from 58.1 to 72.7 over the quarter. This suggests that our sample savers are, on average, expected to have a higher standard of living in retirement than was expected at the end of the previous quarter.
Expected Outcomes Improve Despite Asset Volatility
Investment returns on the majority of asset classes were weak over the quarter, particularly for more However, this was more than offset by increases to the expected future return assumptions across all asset classes. These increases have an impact on all members – but on the younger members in particular.
Mixed Position for Savers
If we consider the effect of weak investment performance in isolation over the quarter, it is more pronounced for the savers with larger DC pots already built up (the 40- and 50-year-old) and for those closest to retirement who had already started to de-risk their pension investments:
The 30-year-old saver would be expected to be around £450 p.a. worse off in retirement.
The 40-year-old saver would have been around £975 p.a. worse off, while the 50-year-old is the most affected, with their expected income reducing by around £1,100 p.a. The oldest saver also saw a reduction of around £450 p.a. due to investment returns over the quarter. However, the April increases in the State Pension and increases to the expected future investment returns, across all asset classes more than offset this reduction due to investment performance over the quarter: The youngest saver had the largest increase in expected income (around £3,900 p.a.) due to the increase in future expected returns, and the longest period to retirement to receive these extra returns. The 40-year-old saver also saw a significant increase in their expected retirement income (around £3,320 p.a.) due to increased future expected returns. Savers closer to retirement saw a smaller increase in their expected income. This is due to the shorter time until retirement over which to receive the additional future return. As mentioned earlier, weak performance on their existing fund values also had more of an offsetting affect. The 50-year-old saver was still expected to be much better off (by around £2,550 p.a.) when compared to the start of the quarter. The expected income for the oldest saver increased more moderately (by around £600 p.a.) as higher future expected returns were offset by investment return over the period. Overall, the oldest saver is expected to be the worst off in retirement, with a retirement income slightly below the moderate standard of living. This excludes any DB benefits they may have which are not included in this projection. The younger three savers are all currently expected to achieve between moderate and comfortable standard of living in retirement.
Pensions Are More Complex Than Ever – But It’s Not All Doom and Gloom When you add to this the current economic climate, the situation may feel overwhelming for some savers. Asset volatility is high due to ongoing geopolitical tensions and their knock-on effects on the economy, while inflation is reaching levels not seen since the 1980s. For many savers who are only used to a period of relatively low and stable inflation, this is the first time they have had to consider its effects and the impact it can have on their finances. Matthew Arends, partner and head of UK Retirement Policy at Aon, said: “It may be a good time to ask yourself some questions about your retirement saving. For example, when are you likely to retire or looking to retire? Do you have a fixed retirement date or will it depend on when you have saved enough to fulfil your dreams? “How long have you got to keep on saving? How will you access your pension saving? How much do you have in different pension pots? How much state pension are you due?”
How Will You Take Your Retirement Pot? Matthew Arends said: “If we take the example of an individual looking to buy an annuity at retirement now, their DC account will have fallen over the first half of 2022. However, the cost of buying an annuity has also fallen by around 25%* (which increases retirement income). Matching investments to how you expect to take your income in the run up to retirement can help minimise any shocks close to retirement.”
Keep Contributing – If You Can
Matthew Arends continued: “Pension saving is one of the most efficient ways to save for your future. Any pension contributions you make benefit from tax relief reducing the actual cost to an individual. Savings made through a work pension scheme will also receive contributions from your employer which can significantly increase the amount saved.
“With inflation running high, savers may be tempted to cut back or even stop pension contributions. While this may help with short-term living costs, ultimately the more individuals can save into a pension, and the earlier in their career they can make savings, the higher their retirement income will be. So try to keep on contributing if you can.”
*Figures based on a joint life annuity paid from age 65 providing RPI linked pension increases in payment and a 50% spouse’s pension.
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