Pensions - Articles - Standard of living in retirement not improved in 3 years

 The Aon UK DC Pension Tracker has now returned to 2020 levels, suggesting DC savers’ expected standard of living in retirement have not improved in the last three years.

 In February 2024, the Pensions and Lifetime Savings Association (PLSA) released the latest regular update to its Retirement Living Standards. This update included new research with focus groups to detail what is needed for a ‘moderate’ and a ‘comfortable’ standard of living in retirement.

 There have been increases to all three Retirement Living Standards, with the most significant increase to the moderate standard, where an additional £8,000 per year would be required for a single person to achieve this standard of living in retirement.

 Allowing for the updated living standards, meant the Q1 2024 release of the Aon UK DC Tracker showed a significant fall from the previous quarter.

 Matthew Arends, partner and head of UK retirement policy at Aon said: “The latest updates to the Retirement Living Standards not only allow for price inflation but also ‘expectation inflation’ where there is an increase in the expectations of what is required in retirement at each standard of living. This expectation inflation was particularly apparent in the increase of the moderate living standard which increased by nearly 35 percent and is now around 75 percent of the comfortable living standard.

 “While everyone’s expectations of what constitutes an acceptable standard of living in retirement will differ, this trend will inevitably require an increase in retirement savings. Savers should ensure they pay close attention to their pensions savings and consider whether additional savings may be required to achieve the living standard they want in retirement.”

 Aon UK DC Tracker

 Source: Aon UK DC Pension Tracker (1 October to 31 December 2023)

 Over the quarter (October to December 2023), the Tracker fell from 77.5 to 59.3.
 If we exclude the impact of the changes to the Retirement Living Standards, the Tracker fell from 77.5 to 76.0 due to lower expected future investment returns. But if we allow for the impact of the updated Retirement Living Standards, the Tracker fell further, to 59.3.

 All members are expected to receive less from their private pension saving compared to the start of the period due to lower expected future returns. This would be both in the approach to retirement and after they begin to access their savings. This was offset slightly by positive benchmark investment returns over the quarter, particularly in growth assets.

 Matthew Arends said: “The results suggest that our savers are expected to have a significantly lower standard of living in retirement than was expected at the end of the previous quarter. The latest update to the Retirement Living Standards has left our savers, on average, in almost the same position as when the Tracker was first introduced at the end of 2020.”

 Changes to the PLSA Retirement Living Standards
 In February 2024, the PLSA released their latest update to the Retirement Living Standards, which showed a sizeable increase in required expenditure at retirement at all levels. The February 2024 update sees the first ‘rebase’ of the Retirement Living Standards since they were first introduced in 2019.

 This ‘rebase’ was done through undertaking new research with groups of members of the public to detail what is needed for a moderate and comfortable standard of living in retirement - in effect, repeating the research undertaken when the first Retirement Living Standards were introduced.

 ‘Expectation inflation’ - expecting more from ‘moderate’
 While rising energy, food and motoring costs have contributed to the increases at all levels, one of the key drivers of the increases to the moderate and comfortable standards has been changing attitudes towards supporting family members, and an increased importance given to spending time with friends and family. This is most apparent in what the research suggests are changes required for a ‘moderate’ standard of living in retirement.

 Looking at changes in the budget for eating out and takeaways, the amount required for a moderate standard has more than doubled since 2019 - increasing from £75 per month, which covered both eating out and takeaways, to £130 per month for eating out and £40per month for takeaways. By contrast, the amount required for a comfortable standard has only increased from £50 a week to £60 a week over the same period - albeit that this represents a 20 percent increase.

 Another significant change to the moderate and comfortable living standards is that, with increasing cost of living challenges, there is now a greater expectation of the need for retired people to help members of family with day-to-day costs, including food shopping and bills. Both moderate and comfortable living standards now include £1,000 each year for supporting family members (for example paying for grandchildren’s activities). In addition, both moderate and comfortable living standards now include £100 a month to take others out for a meal, which is on top of the amounts above for eating out.

 Changing the balance of standards
 Since the Retirement Living Standards were first introduced, the balance between them has so far remained relatively constant. The minimum living standard has been around one-third, and the moderate living standard around two-thirds, of the comfortable standard.

 However, the increases to each of the standards in the 2024 ‘rebase’ have not been equal across the standards. The minimum standard had the smallest increase of 12.7 percent, closely followed by the comfortable standard which increased by 15.5 percent.

 However, the moderate standard increased by a staggering 34.3 percent which means that it is now around 75 percent of the comfortable standard, up from 62 percent.

 This unequal shift has increased the gap between the minimum standard and the moderate and comfortable standards. For savers who will comfortably achieve the minimum standard but are targeting a higher standard of living in retirement, the moderate standard is now further out of reach.

 A more positive development for lower income retirees is the increase to the State Pension coming into force from April 2024. The minimum standard for a couple (outside of London) will now be met by two full state pensions.

 Savers’ positions (measured compared to the ‘comfortable’ living standard)

 
 Source: Aon UK DC Pension Tracker (1 October to 31 December 2023)

 Movement over the final quarter of the year
 The decrease in the Aon UK DC Pension Tracker over the fourth quarter of 2023 was primarily driven by increases to the PLSA Retirement Living Standards. In addition to changing standards, savers’ pots were also expected to provide a lower level of income in retirement, all else being equal, than at the start of the quarter.

 All our savers are now further from achieving the (revised) ‘comfortable’ level of retirement living standard than they were at the start of the quarter:
 • The youngest saver saw a decrease in their expected income, of around £350 p.a. or just over 1 per cent. This was driven by a decrease in the expected future investment return assumptions both pre- and post-retirement over the quarter.
 • The 40-year-old saver also saw a decrease in their expected retirement income, of around £185 p.a. (or 0.5 per cent). Again, this was primarily driven by decrease in the pre- and post-retirement investment return assumptions.
 • Our 50-year-old saver saw the largest decrease in their expected retirement income, with a decrease in expected income over the quarter of around £850 p.a. (nearly 2.5 per cent) when compared with the start of the quarter. This was again driven by falls in the pre-and-post retirement return assumptions, which were particularly large for this member. These falls were offset marginally by strong investment returns over the quarter on the savers existing funds.
 • The oldest savers’ expected income was relatively unchanged over the quarter – a decrease of just £35 p.a. (0.2 per cent). As they are the closest to retirement, they benefitted the most from strong asset returns over the quarter and were least impacted by changes in future return expectations.
 • Overall, the oldest saver is expected to be the worst off in retirement, albeit with a retirement income of around 140 percent of the ‘minimum’ Retirement Living Standard. This excludes any defined benefit pension benefits they may have but which are not included in this projection.
 • Following the increases to the Retirement Living Standards, all savers are further from reaching a ‘comfortable’ standard in retirement. The 40-year-old and 50-year-old savers are now expected to achieve an income in retirement broadly mid-way between the moderate and comfortable standards. The youngest saver is currently expected to achieve an income in retirement only marginally above the (updated) moderate standard.