Saving more: What is an adequate retirement income?

Current savers may not be putting enough away to retire, studies show. The Pension Policy Institute (PPI) has advised that there is a real risk of UK savers experiencing a shortfall of retirement savings.

According to their studies, someone earning a lower income of £15,700 would need to save a private pension worth £57,000 to simply cover their current earnings. Meanwhile, someone earning a median income of £24,900 will need to save £278,000 by their retirement date. 

The PPI suggests that these figures are increasingly difficult for individuals to meet and urges the government to start educating UK citizens about what they need for adequate retirement savings.

 

What the issues are

There is no single cause for the increasing likelihood of shortfall and not everyone will face the same level of risk in this regard. However, changes in the landscape of the modern workforce have certainly made an impact. 

One of the more apparent causes of this pension shortfall is the widespread switch from Defined Benefit (DB) pensions to Defined Contribution (DC) pensions. This shift could be a defining factor in leaving savers in a bind when retirement comes. The PPI estimates that 90% of all DC savers are at risk of experiencing a shortfall.

The type of pension that you have isn’t the only contributing factor to savings issues. The PPI indicates that those most at risk of not having enough to comfortably retire include:

  • Low-income earners
  • Part-time workers
  • The self-employed
  • The unemployed

These groups are those most likely to be missed with mandatory auto-enrolment in the workplace. Because of the changing landscape, particularly with the projected growth of the gig economy and the effects of the past year, modifications to both estimates of adequacy and the auto-enrolment scheme may be necessary.

 

Changes that could help

It’s not all bad news though. The PPI has made specific suggestions that could begin turning the tide on pension savings. A major crux point of this is to review, and revise, the existing advice on how much is enough for retirement.

The PPI and the Pension and Lifetime Savings Association (PLSA) seem to agree that the most important step is to clearly define income adequacy targets. Once accomplished, it will be imperative that the government take heed and start making changes. Some of the possible revisions suggested include:

  • Lowering the auto-enrolment age to 22
  • Removing the £10,000 annual earnings threshold from workplace schemes
  • Raising minimum contributions from 5% to 8%
  • Providing self-employed individuals with access to auto-enrolment schemes
  • Implementing automatic Pension Wise advice meetings beginning at age 50

Nigel Peaple, Director of Policy and Advocacy at PLSA, states that “…if the level of automatic-enrolment contributions is not raised, only about half of people eligible for workplace pensions will achieve the 2005 Pension Commission’s target retirement income replacement rates.” If these actions are taken, savers across the UK could find themselves much better positioned for the future.

 

What you can do

While PLSA and The PPI work to spur the UK government into action, there are things you can do to help ensure you are not among those unable to save enough for retirement. One of the best things you can do is to take the time to fully understand your Annual Benefit Statement. This document can be a good indicator of where your account stands, how much you have saved so far and many other important details about your account

When you look at whether or not you are saving enough, take the considerations found here into account. If you feel your existing investments haven’t been arranged the way you’d prefer, you can also review your investment options.

Remember as you review your account and Annual Benefit Statement, you are in control of the way you save. If you choose to make changes to your savings plan, you can always access your account and make informed decisions through that. Before taking action, it is important to always seek professional advice.