Brits are failing to put aside sufficient provision for retirement, according to a survey conducted by Schroders. There is a mis-match between the income people believe they need in retirement and the actual cost of living. Where non-retired individuals expect living expenses will take up just 34% of their retirement income, in actuality it accounts for 49% of expenditure.
The millennial generation’s estimates were furthest from the reality; younger you are the less you expect to spend on every-day expenses in retirement – the closer to retirement you become the more accurate the approximation.
However, despite the failure to accurately budget for everyday spending in retirement, 85% of those surveyed who have already retired consider their pension income sufficient. This figure increases to 91% among those investors with an advanced, or expert, financial knowledge. Even among those retirees who describe their investment knowledge as beginner or rudimentary only 13% of those surveyed said they had insufficient savings to live comfortably in retirement.
Currently, working Brits are saving on average 12% of their income towards retirement, although they consider the right amount to be 14%.
Expected income levels’ expectation versus reality were also mis-aligned. Across the UK, workers expected to receive a retirement income of 66% of their final salary – but the reality was an average pension of 53% of final salary. It is worth noting that among current retirees, the prevalence of more generous defined benefit pension schemes is greater than among those currently working – meaning this average retirement income percentage is likely to fall over the coming decades.
Lesley-Ann Morgan, Head of Retirement at Schroders, said there was a real danger that people were underestimating their basic living expenses and the level of income they will need to live comfortably in retirement – particularly given the current environment of low returns and increasing inflation which make it harder to meet investment goals.
“There is no magic wand for savers. To avoid facing challenging financial circumstances on retirement, they need to recognise the need to start saving as much and as early as possible,” she said. “Leaving retirement saving until you are nearing your 50s and 60s is likely to be too late to make up a savings gap.”
Retirement Income Set to Fall
Last week, the Pensions and Lifetime Savings Association published the report Hitting the Target: A Vision for Retirement Income Adequacy, that revealed a more grim outlook for pensioners. Their report found that only 20% of respondents were confident they were saving enough for retirement.
“Future retirees are less likely to have an adequate retirement income than current retirees, due to lower levels of pension saving and the decline in home ownership amongst younger savers. At the same time, the cost pressures that future retirees are likely to face are increasing. Increased and, in some cases, additional costs mean that savers will have to save more if they are to maintain their working age standard of living in retirement,” the report reads.
The report found the greatest negative impact on pensioners’ lifestyle were longevity, the rising cost of care and increasing housing costs. It also found that workers were saving less, and the falling levels of home ownership would also impact the retirement income of future generations.
