Five million British workers are suffering a midlife pensions crisis which could leave them facing hardship in retirement, new research reveals.
Under-saving is most prevalent among 40 to 54-year-olds, according to a new measure of retirement adequacy, which accounts for basic needs and housing costs and is linked to current income.
People in midlife who are single, renting their home or working part-time are most likely to be falling short for retirement, says pension giant Legal & General
This generation lost out because they joined the workforce between two pension eras that benefited their older and younger colleagues.
They were too late to fully reap the rewards of generous final salary schemes, which provide a guaranteed income until you die. These were already being closed across the private sector and replaced by stingier defined contribution pensions.
But they were too early to be signed up by the successful pension auto-enrolment initiative. This forced all employers to set up pensions and pay in minimum amounts for their workers, but only started being rolled out in late 2012.
Pension saving: Generous final salary pensions have been replaced by stingier invested pots in the private sector
Are YOU saving enough for retirement?
One in five people born between the early 1970s and late 1980s only began saving after age 35, leaving less time to build a sufficient pension pot, says L&G. The findings came as it launches a new campaign called Decades Ahead to address financial wellbeing and security.
It found the average pension fund for a 47-year-old is £27,000, but the median retirement fund figure is just £4,000 for renters at that age, and £6,000 for part-time workers.
Research among 8,000 pension savers aged 25 to 54 revealed nine million people in total could be undersaving and risking hardship in old age.
Cost of living pressures, caring responsibilities, insecure employment and health issues all have an impact on people’s ability to save, says L&G
Its study, which also analysed official data on salaries, wealth and assets, has followed other companies like Hargreaves Lansdown in coming up with a new approach to assessing whether your income will be adequate in retirement.
L&G calls its measure MRR – Minimum, Replacement, Rent.
It builds on the widely-used Pensions UK income target figures, which do not include income tax or housing costs if you are still renting in retirement – see below.
Pensions UK estimates the minimum a single person needs to get by is £13,400 a year, or £21,600 for a couple.
But L&G also factors in the costs of rent, and uses a ‘target replacement rate’ – the amount of your salary at retirement you should aim to replace .
Originally devised by the Pensions Commission in the early 2000s, the replacement rate was updated a few years ago by the Institute for Fiscal Studies. It finds that people earning up to around £17,000 need an income worth 80 per cent of their previous wage.
From £17,000 to £31,500 it is 70 per cent, from that level to £45,000 it is 67 per cent, from there to £90,000 it is 60 per cent, and if you earn £90,000-plus it is 50 per cent.
António Simões, Group Chief Executive Officer of L&G, says: ‘A comfortable retirement doesn’t happen by accident. It’s built over a lifetime of saving. Just as pension savings compound over time, so too can inequality and missed opportunities.
‘Our new research highlights the scale of the challenge, particularly for today’s midlifers.’
Simões says it’s not too late, even if you have reached your 40s without saving into a pension. He adds: ‘L&G is taking a new approach, bringing together industry, policymakers, civil society, employers and savers, to recognise a nuanced picture and drive collective action.’
How to build a £187,000 pension pot
Many 40-54 year olds are still in a window of opportunity to change their retirement prospects, according to L&G.
You still have a potential two to three decades to contribute, invest and accumulate savings and build a tidy pot.
L&G estimates a 47-year old paying into a pension for the first time could contribute the auto enrolment minimum of 8 per cent over two decades and save a £116,000 fund by age 67.
Under auto enrolment, individuals put in 4 per cent of their qualifying earnings between £6,240 and £50,270 of salary, while employers put in 3 per cent and tax relief is 1 per cent.
L&G says a fund of this size could produce part of an income of £19,160 a year.
That includes a full state pension which is worth £12,550 a year from next month, and assumes you buy a single life inflation-linked annuity, guaranteed if you die within the first five years, at today’s rate of 5.4 per cent.
It says if you increased your personal contribution rate by 1 per cent each year, so 12 per cent of your salary was going into your pension, your fund could reach £187,600 and generate an income of £23,230 a year, including the state pension.
If you are worried you have not saved enough for old age, L&G boss António Simões offers the following checklist for action.
‘First, know your number. Check what you have saved and what income it might generate in retirement. Second, review your assumptions, from retirement age to housing costs.
‘Third, stress-test your contributions. Even a modest increase, or committing part of a future pay rise, can change the long-term picture.’
SIPPS: INVEST TO BUILD YOUR PENSION
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