More interestingly, the older we get the lower the retirement income expectations. Generation Xers aged 45 to 54 think £25,445 would be an adequate retirement income, whereas Millennials aged 25 to 34 have a retirement income target 40 per cent higher than their parents at £35,648.
Comparing these retirement income expectations to the October 2019-published study by the Institute and Faculty of Actuaries (IFoA), building on the Pensions and Lifetime Savings Association’s (PLSA) Retirement Living Standards research, reveals that most people’s expectations sit about £2,000 a year below the average retirement income recommendations for a ‘Comfortable’ Retirement Living Standard currently set at £33,000 UK-wide.
Looking at the oldest age group (age 45-54), those most likely to have properly considered retirement income expectations, and based on their lower expectation of needing £25,445 each year of retirement; just over a third (35 per cent) of that total retirement income would come from their State Pension, assuming they gain access to the maximum State Pension entitlement valued at £9,110.40 in the tax year 2020/21.
So, are their current personal pension savings likely to deliver the remaining 65 per cent of retirement income? To calculate this, Portafina looked at its own customer-base of middle-income earners. Its clients’ average personal pension pot size, based on a random sample of 9,261 of its clients with an average age of 60, was £49,813. Taking an annual return of five per cent after all charges, their average pot size by anticipated State Pension age of 68 should grow to £74,250.
Portafina then ran a series of annuity quotes based on a non-smoking male in moderately good health, aged 68 and with a pension valued at £74,250. The most generous annuity quote gave him an additional £4,035.84 of guaranteed annual retirement income.
Taking £9,110.40 (before inflationary increases over the next eight years) State Pension entitlement plus £4,035,84 generates a total retirement income estimate of £13,146.24 – roughly half of the average retirement income expectation and only £2,946 above the IFoA/PLSA estimated ‘Minimum’ Retirement Living Standards benchmark.
More worryingly, Portafina’s average predicted retirement income (based again on their typical middle income clients) and assuming retirement at State Pension age, is £3,916 less than the national living wage for UK workers living outside London (set at £17,062) and a huge £6,744 less than the annualised living wage for Londoners, which is currently £19,890.
The current average full-time salary in the UK, according to the Office of National Statistics is £36,661, meaning that the thousands of workers captured in this research will need to take a massive 64% pay cut when they retire - assuming they have no other savings or investments to draw on.
Commenting on the findings, Jamie Smith-Thompson, Managing Director of Portafina, said: “It’s clear from this research that although people’s retirement income expectations are quite modest, and in line with the new Modest Retirement Living Standard, they are still unlikely to reach their target without increasing pension contributions significantly. Too many have been making minimum contributions for too long and that reality is beginning to show in the predicted retirement income shortfalls that our research reveals.”
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