It has been a strong year for DC savers, with expected retirement income rising between £2,000 and £6,000 according to data from Aon’s UK DC tracker.
Figures for the last quarter of 2024 show that over the year this tracker had risen by around 20 per cent, reversing much of the fall seen in 2023, although the tracker is yet to return to the level it reached prior to the 2023 prior to the update to the PLSA living standards.
Over the final quarter the tracker rose from 64.6 to 69.1. Aon says this rise was driven by an increase in expected future returns post-retirement, and positive actual investment performance, particularly in equity markets.
This tracker is based on a sample of DC savers at different stages of their life. Aon found that it is mid-career savers in their 50s who have seen the most significant increases. However it adds that the significant rise to the State Pension has also helped boost the overall increase during 2024 for members of all ages.
Overall the tracker found the youngest saver’s expected income increased by around £770 p.a. (a 2.2 per cent increase), driven by positive investment performance and an increase in future expected return assumptions post-retirement.
This was partially offset by a decrease in expected future investment return assumptions before retirement and lower expected salary increases over their working life.
The 40 years old saver saw an increase of around £1,615 p.a. (or 4.3 per cent) in their expected retirement income. Again this was driven by similar factors.
The mid-life 50-year-old saver saw the largest increase of around £2,240 a year (or 5.8 per cent) in their expected retirement income. Due to this saver’s larger existing funds, they benefited the most from the positive investment returns over the quarter, with increases to expected post-retirement investment returns also benefiting this saver.
The oldest savers saw an increase of around £600 p.a. (around 2.8 per cent). This saver benefited from an increase to post-retirement expected return assumptions together with strong investment performance over the period. As this saver is close to retirement, they also benefited from an increase in their expected investment returns pre-retirement due to their higher allocation to bond assets (on which expected returns increased). This more than offset a reduction in the expected future returns on equity assets.
Aon partner and head of UK retirement policy Matthew Arends says that next year the tracker may fall agin given inflation and the expected future increase again to the PLSA’s retirement living standards. But he adds that this may be “more muted” than with previous updates.
Arends also said that the increase to employers National Insurance rate could have a positive knock-on effect on pensions. He says that while this will ultimately increase staff costs for businesses, employee pension contributions made via ‘salary sacrifice’, will become more tax-efficient, as these do not attract either employee nor employer NICs,
“The changes to employer NICs on earnings will make it more attractive for employers to set up salary sacrifice and bonus sacrifice arrangements, benefiting employers and employees alike by reducing NIC costs and increasing employee take-home pay.
“In addition, employers who offer ‘cash-in-lieu’ of pension contributions – perhaps for those affected by the annual allowance – are likely to need to review their terms. Many employers offering these terms make a deduction for the employer NICs payable on the cash sum and this will need to be updated for the new NIC rate.”
