The UK’s retirement income crisis is expected to get worse as a result of stagnant wages and growing living expenses; the typical worker in their 30s can expect to see a reduction in their pension pool of $15,000 by the time they retire, according to research from Scottish Widows.
According to Scottish Widows’ most recent Retirement Report, individuals with average incomes in their 30s who were automatically enrolled in a pension plan in 2012 may have made £7,000 less in contributions by 2024. Due to missing compound interest, these “lost contributions” cause the individual’s total pension pool to be reduced by £15,000 when they retire.
According to the yearly study, 76 per cent feel they must take action to deal with the financial difficulties, and 81 per cent are worried about making ends meet in the current cost of living environment.
Nearly 35 per cent intend to reduce non-essential holiday and leisure spending while 16 per cent are being forced to make tougher choices like reducing expenditures on necessities like food and utilities.
Almost 11 per cent said they had to cut back on or cease paying into their pensions before the cost-of-living problem took hold.
Meanwhile, nearly 24 per cent had already used some of their funds. This reduces pension savings by almost £37 on average per month, which equates to more than £2.5b in lost contributions to the UK economy annually.
In comparison to other European nations, the UK has consistently had low pension contribution rates over the past few decades according to the study. For the average saver, an employee-employer contribution rate of 8 per cent will not be sufficient to support a respectable standard of living in retirement, leaving people with less retirement income above and beyond the essential safety net of state pensions and retirement benefits.
A comparable percentage of 50 per cent of those polled admitted they don’t feel they are effectively preparing for retirement while over half or 57 per cent expressed concern about their financial situation in retirement. Nearly 18 per cent of respondents claimed that their pension savings are currently placed in cash, cash-like assets, or low-risk assets like UK Government bonds, or that they intend to do so in the future.
The average person holding half of their £36,200 pension funds fully in cash between the ages of 35 and 54, when investment returns are crucial, might be exposed to losses of more than £1,300 in a single year in real terms and more than £2,100 in two years.
Scottish Widows head of policy Pete Glancy says: “We are facing a myriad of issues and there are no easy solutions. It’s sadly understandable that households are being forced to make some tough choices in their budgets, but it’s important they do so whilst taking a longer-term look at their finances. Having a decent employer or personal pension in place is one of the best ways to plan for your future financial wellbeing, so people should think twice before making decisions that could result in long-term pain for a short-term gain.
“As a guide, we recommend that an individual should look to save a minimum of 12 per cent of their salary to secure a consistent quality of life, but aiming for at least 15 per cent is more likely to provide a comfortable retirement.”
Glancy adds: “There are also calls for another Pensions Commission, however, we believe the scope is too narrow. Record-breaking inflation does not just threaten peoples’ ability to save, it can also severely reduce the value of the savings they already have if they are not invested appropriately. The public policy aim should not simply be to help people accumulate the largest possible pension pot, but to explore creative and holistic solutions to help them enjoy the best possible standard of living in retirement.”
