Aon UK DC pension tracker experienced a slight decrease in Q1, impacting younger savers the most.
The Aon UK DC Tracker decreased from 69.7 to 67.9 throughout the course of the quarter. According to Aon, the savings of the sample savers are anticipated to yield a slightly lower income in retirement than at the end of the preceding quarter since this decline is nearly completely caused by decreases in future predicted returns.
Aon says this suggests a lower expected retirement standard. Older savers were least affected by the overall decline as they enjoyed higher-than-expected returns in early 2023 and were less impacted by lower future returns.
It also suggests that younger savings who invest in equities might do better than older savers who invest in defensive assets.
Aon chief investment officer Jo Sharples says: “There is a range of different investment strategies in the marketplace at the moment. In our own funds’ default strategy we take an outcomes-centred approach and favour a higher growth allocation heading into retirement.
“This reflects most members wishing to access their savings flexibly when they retire, and therefore remaining invested for many years. There will therefore be the need to deliver above inflation growth to maintain the purchasing power of investments as members start to withdraw their savings.”
“Analysis has shown that different strategies have yielded significantly different returns over the past five years. The difference between the leading funds and those with lower returns could be as much as 22per cent over the five-year period. Strategies maintaining a higher allocation to ‘growth’ assets, such as equities, throughout the ‘de-risking’ phase and into retirement have generally outperformed peers and provided members with greater inflation protection over the long term.
“Alternatively, members could ensure their income keeps pace with inflation through the purchase of an inflation linked annuity. This would guarantee their income increases in line with price inflation each year, although it may come at a significant upfront cost.
“Members who take all their benefits at retirement as cash may not only pay a significant tax charge but will also have to consider what they do with this withdrawal. At current inflation levels, leaving it in even the highest returning bank savings account would see the value reduce in real terms each year.
“It is worth noting that one element of savers’ retirement income which is guaranteed to keep up with inflation is the state pension. This increases most years in line with the ‘triple lock’, rising in line with inflation, national average earnings, or 2.5 per cent, whichever is highest. The 10 per cent increase applied in April 2023 is likely to have come as a welcome boost to current pensioners.”