Retirement adequacy is hugely topical with the Pension and Lifetime Savings Association (PLSA) previously reporting that 70% of families are at risk of not reaching a moderate level of income in retirement. Many are having to make difficult adjustments and tighten belts in retirement.
When thinking about what retirement adequacy means, put simply, it's having enough savings to meet income needs as you phase into retirement – whatever that might look like for you. Whilst this sounds simple, defining the required income throughout retirement is a complex challenge. For example, how much is "enough" and more importantly, how do you get there?
The answer is inevitably, "it depends". It depends on things such as an individual's pre-retirement lifestyle, how they choose to move into retirement and how they plan (or need) to spend their time and money in later life. In our paper, we have used the PLSA Retirement Living Standards to model scenarios and the impact of some of the changes we are suggesting
The pensions industry has been looking at this issue for a very long time and the retirement landscape is continually evolving, as are our lives. Today's savers are facing challenges not faced by today's retirees.
Challenges faced by today's savers
Defined benefit (DB) pensions in the private sector are all but gone. Today's workers have been auto-enrolled into Defined Contribution (DC) schemes with little understanding of what outcomes to expect, let alone what good looks like, how to get there and the challenges they face along the way:
- The proportion of homeowners is falling, with younger generations more likely to still be renting in retirement—the so-called "generation rent."
- Phased retirement is on the rise, with individuals choosing (or needing) to work longer into later life.
- Inequity is rife, with retirement outcomes varying widely with significant differences depending on gender, earnings and even ethnicity.
- People are living longer than ever before, so their money needs to last longer. They also need to accept that their ability to make good financial decisions might decline with age.
- State pensions are becoming increasingly difficult to fund, with people living longer and pressure on the government's finances.
Our recommendations
It's clear that anyone wanting more than the modest foundation provided by the State pension will need to ensure their private pensions, such as their workplace DC pensions, work harder to deliver better outcomes and we believe there are three key elements to this:
Saving more
The simplest concept to make pensions work harder. If you pay more in, you'll get more out and so we support using automatic enrolment to achieve this. The challenge remains, how much is enough? Particularly where one size does not fit all. Therefore, we believe a structure where the default under automatic enrolment is 12% would be a significant step in the right direction. However, we also believe that flexibility to remain auto-enrolled but at lower rates (on an affirmation basis) would help to manage pressures from living costs and provide flexibility for those who already have good pension savings. Perhaps a lower rate of 8% could be deemed compliant to support such individuals, but not be the default position.
Maximise returns
Making sure enough investment risk is taken at the right time to generate the long-term growth needed. This means investing in higher risk assets that give greater potential for growth and staying in these assets for longer.
Making better retirement choices
Making informed decisions about how and when to spend your DC pot is vital to supporting retirement adequacy. We believe members should be given access to guidance and/or advice and that this should, at the very least, be facilitated either by the provider, trustee or sponsor.
Coupled with continued efforts to improve the nation's financial capability via education and awareness throughout life, we believe that the suggestions in this paper could enhance savers' retirement outcomes significantly, but this paper is not the end of the journey.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.