Will you suffer a disaster in retirement?
Seven ways you could be poorer than you think… and how to build a decent pension
– Many people saving now are likely to be poorer in retirement than they realise
– Making up the gap basically means saving harder and working longer
– Employers dumping final salary pensions and Government hiking state pension age are among unfavourable developments
– Retirees have comfortable incomes now, but future generations face a real struggle
Many workers are heading for disappointment when they retire on far less comfortable pensions than those enjoyed by today’s older generation.
Employers dumping generous, guaranteed final salary pensions and government hikes to the state pension age are among eight hurdles that will make people saving now poorer in retirement than they now realise.
You could be in for a nasty surprise, especially if you lost income or your job in the pandemic, and even if you are prepared to make up the gap the options are basically saving harder and working longer.
Today’s average pensioner incomes have almost doubled compared with 25 years ago, even taking inflation into account, from £168 in 1994-95 to £331 in 2019-20, according to government figures.
This means more people are having the retirement they’ve always dreamed of financially now, but this will not be the case for younger generations.
‘If you’re working now, and expecting your retirement to shine just as bright as today’s pensioners, you could be in for a horrible shock. Current retirement incomes are a reflection of pensions decades ago.’
‘The wholesale switch to defined contribution pensions over the past few decades had a dramatic impact on the incomes we can expect in retirement.
‘Workers today also have to juggle pension saving with higher living costs – especially housing, having children later, and longer life expectancy.
‘If you’re working now, and expecting your retirement to shine just as bright as today’s pensioners, you could be in for a horrible shock’
‘If their parents live longer, and need care, they could be set for a hugely disappointing income in retirement.’
Reasons why your retirement income may fall short
1. You’re less likely to have a final salary pension
There’s been a big shift away from gold-plated pensions – known as ‘defined benefit’, which translates as guaranteed – over the past few decades.
‘Back in 1997, about 46 per cent of workers had a defined benefit pension.’
‘Fast-forward to 2019, and that figure has shrunk to 27 per cent, according to the Office for National Statistics.
‘Most people will be retiring with less generous defined contribution workplace and personal pensions instead.’
2. Your pension contributions are lower
Millions of more workers now have a defined contribution pension thanks to auto-enrolment, but their contributions are much lower.
‘The most common employee contribution in a defined contribution scheme is 4-5 per cent whereas in a defined scheme it’s 7 per cent or more.
‘The most common employer contribution in an occupational defined scheme is between 2 per cent and 4 per cent, whereas the most common in a defined benefit scheme is 20 per cent or more.
‘As a rough rule of thumb, to build a decent pension pot, savers should aim to contribute 12.5 per cent of their earnings each month, including tax relief and any employer contribution.’
3. Your state pension will kick in later
‘The age at which you can claim your state pension has been steadily increasing, and is set to rise further.’
‘Women have been able to get their pension at age 60 since 1940, but this increased to 65 between 2010 and 2018. For men and women, the age rose to 66 last October.
The next rise to 67 is due to be phased in between 2026 and 2028, and the one after to 68 is currently scheduled between 2037 and 2039.
‘In reality, workers in their 20s may not get their state pension until their 70th birthday – or later.’
4. You’ll live longer so your money has to go further
Our retirements are getting longer as we live longer lives.
‘The average 65-year-old woman will live to 86, while a 65-year-old man will live to 83 on average, according to official figures.
‘Many workers will live into their 90s or even reach 100. It is estimated that one in three of today’s babies will live to be a centenarian.’
5. You’ll have kids later and they’ll live with you for longer
Parents are getting older and children are more likely to live with them for longer, as many young people opt to stay at home and save up to buy their own first property.
‘Traditionally, the empty nest years of our 50s was when we prioritised pension savings above all else. If you still have grown-up kids at home – and you’re possibly looking after elderly parents too – pension saving may take a back seat.’
6. You might still be paying off debts – including the mortgage – from your retirement income
‘Research shows that around one in five people expects to be paying their mortgage in retirement.’
‘It’s becoming increasingly common because people are getting onto the property ladder later in life, while mortgage terms are getting longer.
7. You may not inherit as much as you expect
Inheritance can be a tricky topic that families often shy away from, but research shows almost one in five people expect a significant inheritance, and almost two-thirds of them need it to fund their retirement.
‘It’s never safe to rely on an inheritance because people can live longer than expected, spend more, need to pay for care, or simply change their mind.’
How to sort out your pension if you fear it’s falling short
If you are worried about your pension and whether you will have enough.
Investigate your existing pensions. Broadly speaking, you need the following:
– The current fund value
– The current transfer value
– Whether the pension is in a final salary or defined contribution scheme
– If there are any guarantees – for instance, a guaranteed annuity rate – and if you would lose them if you moved the fund
– The pension projection at retirement age.
You should add the forecast figures to what you anticipate getting in state pension, which is currently £179.60 a week or around £9,300 a year if you qualify for the full new rate.
Get a state pension forecast here.
If you are tempted to merge your old pensions, click here.
If you have lost track of old pensions, the free tracing service is here.
About Mike Coady
Mike Coady is an expat expert based in Dubai and is on hand to help with all of the above and more.
Mike is an award-winning money coach and industry leader in the financial sector.
Qualified to UK Financial Conduct Authority (FCA) standards, a member of the Chartered Insurance Institute, a Fellow of the Institute of Sales Management (FISM), a Fellow of the Institute of Directors (FIoD), and featured as a highly qualified Financial Adviser in Which Financial Adviser.
To learn how to choose a great financial adviser, download our free guide.
Originally published by Thisismoney.co.uk.