A recent study published by the Pension and Lifetime Savings Association (PLSA) caught the attention of mainstream media, and turned the spotlight on the need to plan ahead to enjoy a comfortable retirement.
The PLSA have devised three Retirement Living Standards, which help illustrate the level of income needed to provide a Minimum, Moderate and Comfortable retirement. The PLSA suggests that the Minimum level of income covers essential spending in retirement, with limited funds left over for discretionary expenditure. At the other end of the scale, a Comfortable retirement income provides a greater level of financial freedom, and leaves sufficient surplus income to pay for some luxury items.
The reason that the update to the Standards caught the attention of the media is the significant increase in the level of income required at each Standard level over the last twelve months. For a single person, the PLSA research suggests an income of £31,300 is needed to provide a Moderate standard of living in retirement, whereas this jumps to £43,100 for a couple. These figures represent an increase of over £8,000 for a single retiree, or just over £9,000 for a retired couple, in just one year. The increased costs of living, including higher energy and food prices, have naturally fed in to the higher figures, although the PLSA also highlighted the increased cost of holidays, and the cost of providing financial assistance to family members, as contributory factors.
Increased focus on saving
The PLSA survey acts as a useful reminder of the need to plan ahead for the longer term, and to review whether your pension savings are on target to meet your needs in retirement.
Of course, personal pension savings will form part of any retirement strategy; however, the State Pension will also provide a proportion of the target income amount. The triple lock has led to a significant increase in the State Pension, with the hike of 10.1% last year being followed by an increase of 8.5% from April 2024. An individual who qualifies for the full flat rate State Pension will be entitled to £221.20 per week from April, or £11,502 per annum. This falls some way short of the Moderate Living Standards suggested by the PLSA, and highlights the need for individuals to focus on pension saving to meet the shortfall between State Pension provision, and a more comfortable retirement.
Another point to consider is that many individuals do not wish to work until their State Pension age, which is now 67 for those born after March 1961. Early retirement introduces an additional period of shortfall, as years when the State Pension is not payable will need a greater level of funding from other sources, such as personal pensions.
Since the advent of auto-enrolment, most UK employees are enrolled into a workplace pension scheme. Whilst the level of contribution made by employees has increased over time, the statutory minimum level of contribution, at 8% of qualifying earnings, is unlikely to be sufficient to bridge the gap. One worrying statistic highlighted by the PLSA survey is that 51% of those questioned believed the minimum auto-enrolment contributions will be sufficient to provide their required level of target income in retirement. This reinforces the need for individuals to start planning ahead and think realistically about the level of savings needed at retirement.
It’s not just how much you save, performance matters
Whilst the amount that you pay into a defined contribution pension will have a major influence on the retirement income it could provide, it is important not to lose sight of the need to ensure that pension savings are invested in an appropriate manner. Pension savings could conceivably be in place for 40 years, and even longer if a drawdown approach is adopted, and this is a significant period of time over which good performing funds could make a significant difference to the overall pot value at retirement.
Take the example of an individual aged 57 with a pension pot of £100,000. They have 10 years left to retirement and contribute £200 per month gross into a pension. If consistent net investment returns of 4% per annum are achieved on the pension savings, the individual could expect to hold a final pension pot of around £178,000 at age 67; however, achieving consistent net returns of 6% per annum over the same time period could increase the pension pot to around £214,000, some £36,000 higher. Naturally, investment performance is never linear, and returns will fluctuate from year to year; however, this illustration highlights the difference performance can make to the overall pension pot value, and the importance of getting investment decisions right at the outset.
It is also important to review investment decisions regularly to ensure that the portfolio strategy adopted remains sensible, given the underlying economic and market conditions. It is also worth considering whether the investment approach needs to be adapted as you move closer to retirement.
The benefits of planning ahead
One key takeaway from the PLSA survey is that the level of pension income needed for a comfortable retirement is increasing. Reviewing existing pension arrangements regularly can help ensure that your pension savings are on target to meet your goals, and that pension investments remain invested sensibly to maximise growth potential over the longer term. These are areas where holistic financial planning can add significant value, and help you achieve your objectives.
At FAS, our experienced financial planners can take an unbiased review of your existing pension savings, to advise whether the level of contributions you are making are sufficient, and review existing portfolio strategies to make sure that funds are invested appropriately. Our in-depth ongoing review service will review your pension savings at regular intervals so that you can make adjustments as necessary to help meet your retirement goals. Speak to one of our planners to discuss whether your retirement plans are on track.