• Two fifths (40%) of young Brits under 40 don’t believe that the state pension will still exist in 2050
• Today’s 35 year olds need to have saved at least £666,000 by age 65 to secure the same standard of living of today’s pensioners
The current average monthly expenditure of a pensioner today, who is not reliant on the state pension, is £1084 a month and this is set to increase to £2930 a month by 2050, an increase of 148%. The figures are based on calculations commissioned by Royal London from the Centre of Economics and Business Research, (CeBR) based on the cost of essential items such as housing, food, heating and transport – plus a few added luxuries. This means that today’s average 35 year old, who is halfway to possible retirement in 2050 and who will represent 1 in 4 of the UK population aged 65 or over at that time, will need to build up a fund of at least £666,000 not taking into account any state pension existing at that time. This is to be able to secure a monthly income which will only just maintain the same standard of living of today’s retirees.
Worryingly the research found that today’s 30 – 40 year olds have a median pension pot of only £14,000, well short of the fund they require to secure a monthly income that will just cover the basic £1715 cost of essentials in 2050. Unless this group start to save more, they could face a retirement in poverty.
In addition, two fifths (40%) of people aged under 40 predicted that there will no longer be the financial cushion of the state pension in 2050. Yet nearly half (49%) of today’s pensioners surveyed said that they relied on the state pension and one in five (20%) of them have no income other than the state pension. If the state pension was not available to 35 year old Brits when they retire they may need to save even more to match the potential loss of the state pension.
Commenting on the Pensions Through the Ages research findings, Fiona Tait, Pensions Specialist at Royal London, said:
“The scale of the challenge facing today’s 18-40 year olds to secure an adequate income for their retirement, potentially from 2050 and beyond, is quite frightening. Royal London research highlights the level of income that people should aim to secure for their retirement if they wish to be able to maintain a reasonable standard of living. However, it is very likely that future pensioner spending will be higher than this and so they need to start saving more now. The research shows that median savings pots are £14,000, significantly below the amount needed.”
The Pensions Through the Ages report provides intergenerational insight into the saving and spending habits of today’s retirees, those aged 65–75, compared with those aged between 18-40, who could choose to retire in 2050 and beyond. It outlines some of stark savings challenges facing today’s younger generations and how pensioner spending will change.
Key findings from the report show that:
• Reassuringly 60% of those surveyed aged 30-40 do have a pension in place. This is similar to the number of today’s retirees, as over two thirds, (68%) of those surveyed aged 65-75 said that they have a pension in place. Nearly half, (47%) of 18–29 year olds also stated that they have started a pension. But this does also highlight that potentially 40% of today’s 30-40 year olds don’t have any pension provision in place to secure their future income in retirement.
• Of those in their 30s who have a pension in place, the average age that they started saving for their retirement was 27. In comparison, today’s retirees said that they started their pension savings at an average age of 31, four years later. For those under 30, the research shows that on average they started saving for a pension at age 24.
• The research also established that Brits in their 30s believe that on average they will need 60% of their salary to live on in retirement. In contrast, the reality is that today’s retirees, those aged 65-75 year olds, are on average having to survive on less than half, (48%) of their pre-retirement salary as their income.
• Over half (54%) of 30-40 years olds not saving for retirement say it’s because they can’t afford to and a further one in ten, (10%) believe that it’s too early to start saving in a pension. Worryingly, one in ten, (10%) say it’s because they don’t know enough about pensions and thought it was now too late to start.
• 84% of 18-40s surveyed said that an incentive, where for every £2 they saved they received £1, would be likely, very likely or definitely encourage them to save more.
• One in three, (30%) of those in their 30s and one in five, (20%) of 18-29 year olds have never reviewed their pension or the level of contribution they are making.
• Nearly three in five, (57%) of those in their 30s and over half, (51%)of those aged 18-29 expect to work part-time after they ‘retire’ to supplement their retirement income. Just over 1 in 20 (7%) of today’s retirees said that they currently work part-time.
• The biggest single piece of financial advice that 65-75 year olds would give those in their 30s is to start saving as soon as possible, (27%). 17% said that they would tell them to start to think about the amount of income they may need in retirement. Only 2% would tell a 35 year old to not worry and live for today.
The Pensions Through the Ages research also highlighted that people would save more if they better understood the benefits of saving in a pension and the beneficial effect that the tax incentive will have on their eventual savings.
Fiona continued:
“The primary purpose of a pension is to provide long term income and too few of the people we surveyed recognise that their income may need to last over 20 years in retirement. The initial stages of auto-enrolment have been successful at increasing the number of people saving, with around 60% saying they have been auto-enrolled into a Defined Contribution, (DC) scheme. This is good news but the level of saving is still not adequate. The research also shows that people do trust pensions, which is one reason why Royal London, in its response to the government Green Paper, has called for pensions with tax relief on contributions to continue to be the main source of people’s future long term savings, rather than ISA-style pensions.
In addition, as the research highlights, over four fifths (84%) of those surveyed said that an incentive would encourage them to save more. Royal London has therefore called for pension tax relief to be at a single flat rate of 33% for all, effectively one pound for every two pounds saved. We believe that this is a fairer system that will help boost the savings of those who have the biggest savings shortfalls.”
Further education on the important role a pension can have in making sure that long-term savings are able to provide a comfortable retirement, rather than relying solely on the state, is crucial. This is where financial advisers alongside pension providers and employers are able to help by improving understanding and creating greater awareness of the need to constantly review pension savings to ensure they are on track to secure the level of income needed.
To veiw the report, Pensions Through the Ages, please click on the document below
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