Despite higher inflation and more volatile investment markets, UK pension savers saw their retirement prospects improve over the last year, according to latest pension tracker from Aon.
This research, which tracks the projected retirement incomes of a sample of typical DC savers across different age bands, now incorporates updated retirement living standards from the Pensions and Lifetimes Savings Association (PLSA) which take into account the recent huge jump in living costs.
As a result this shows a significant fall in the tracker for the first quarter of this year, compared to the previously published figure for Q4 2022.
Aon says it has rebased the figures for end of 2022. This shows that amount of income savers expect to receive in retirement had not changed, however this standard of living this would support has reduced, due to higher costs, particularly of food and energy.
Overall the tracker showed that 2022 was a positive year for savers with DC pensions proving resilient and expected outcomes, as measured by the tracker, increasing over the year.
Aon says this suggests our sample savers are, on average, expected to have a higher standard of living in retirement than at the start of the year – even when the current record levels of inflation are allowed for.
However it points out this average increase masks a more complex range of outcomes for the individual sample savers. Aon says: “All our sample savers are expected to have a higher retirement income at the end of 2022 than they were at the start of the year. However, this improvement is primarily driven by an increase in future expected returns on their pensions saving.
“As we have noted in previous tracker updates, these higher expected future returns are not guaranteed and may not occur in practice. Understandably, many savers may be nervous of relying on unpredictable future returns to make up for a fall in their current fund value – which underscores that the risk to DC pension outcomes is borne by individual savers.”
It adds: “This improvement in expected retirement income may come as a surprise to many savers checking on their own fund value. Typical investment returns over the year have been poor, particularly for older members who may have had some of their funds invested in bond assets which fell in value over the year. For the majority of pension savers, the change in their existing fund value will be the most immediately obvious outcome from 2022 and they may not realise that future expectations could have actually improved.”
Aon adds that the state pension is also expect to increase by more than 10 per cent in April which will help offset inflation for all members. also help people meet ongoing using costs
The report adds: “Looking at the relative change over the year, what is striking is how our 50-year-old sample saver has been squeezed by the combination of the actual investment returns achieved and changes to the assumptions. At the start of the year, our 50-year-old sample saver was expected to have the highest income in retirement.
“Over the course of 2022 this was surpassed by the 40-year-old saver and our youngest 30-year-old saver is now expected to achieve a similar income in retirement. These younger members have suffered smaller falls in their existing (albeit lower) fund values and benefit more from the increase in future expected returns as they are further away from retirement.”