The average worker is on course to miss their target annual retirement income by around £12,000, according to research from the UK’s largest mutual life, pensions and investment company Royal London.
According to a study of 4,000 non-retired respondents, the average pension saver hopes to retire on an annual income of £48,868, including the full state pension which is currently £11,542.
However, many are set for disappointment, according to new research from Royal London. A 22-year-old worker with a starting salary of £24,0001, making the minimum 8% pension contributions (from the employer and the employee) a 2.5% annual pay rise and annual compounded investment growth of 5% after fees would leave the workforce at age 67 with a pension pot of approximately £468,000, if they’d been paying in since day one. Including the state pension, this would provide them with an annual retirement income of approximately £36,600 – £12,200 short of the desired £48,8682.
Royal London research shows that many are mindful of the potential shortfall in their pension savings – three in five (60%) workers think they are either not saving enough for retirement or don’t know if they’re saving enough.
Clare Moffat, Pension and Tax Expert at Royal London commented: “Many people have an idea of how much they would like in retirement but that doesn’t always match the amount that they have managed to save. This means that they might not be able to retire in the style they wish. It’s important to understand how much you need in retirement and the PLSA’s Retirement Living Standards can help with this. Discovering any potential shortfall sooner can give you time to take action to improve your lifestyle in retirement. Someone hoping for an annual retirement income of £48,868 would need to build a pot of approximately £696,000, in addition to the State Pension.”
Changing workplace dynamics
The importance of a workplace pension as a source of retirement income is generally understood and almost half (48%) of workers assessing company benefits place it second only to salary in terms of priorities. Under current auto-enrolment rules, the minimum contribution is 8% of an employee’s earnings – 3% of which must be paid by the employer. However, some employers have a policy of paying more than 3% if you boost your personal contributions too. One in ten (11%) who were offered the incentive said they didn’t use it. Of those, 44% said they couldn’t afford to increase their own contributions while 24% said they didn’t understand it. Changing workplace dynamics means that future generations are likely to have a greater number of pension pots than previous generations. While the average person has 2.4 pension pots, people aged 18-34 already have an average of 2.9 pensions.
Clare Moffat said: “The days of people being wed to one or two employers over their working life are long gone. For younger people today, it’s not unrealistic to think they might build a dozen pots over their lifetime. The best preparation for your long-term future is to start saving into a pension as early as you can. This means that small amounts of money grow into larger sums over time.”
The Gender Gap
Royal London’s research underscores concerns about the gender pension gap. The need to balance work with caring responsibilities means women lag behind men in their pension wealth. According to the research, men are twice as likely to have a personal pension compared to women (34% vs 16%).
Clare Moffat added: “There are many reasons for the gender pension gap, including lower salaries among women, higher levels of unpaid caring responsibilities and the effect of the menopause. If we consider the example above, if the person reduced their hours to 50% at age 35 when they had a child and then increased their hours at age 51, instead of a retirement income of approximately £36,600 including the State Pension, it would be around £32,0003. That’s around £17,000 less than the average pension saver would like. However, taking advantage of financial incentives such as employer contributions and salary sacrifice can help. Even small increases in your monthly contributions can have a dramatic increase in the pot you retire with.”
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