More than 90 percent of private sector workers with defined contribution pensions will not be able to afford a comfortable retirement, according to recent research by the Pensions Policy Institute.
The research predicts that 9 in 10 will not have a comfortable retirement, which to me, is a scary figure and one that could leave many individuals and families forced into financial insecurity in later life.
Lack of final salary schemes
In days gone by it was not uncommon to remain with one employer potentially for your whole career, with a final salary (defined benefit) pension waiting for you in retirement. Now, remaining with one employer for many years is still an option, but the availability of valuable final salary (defined benefit) pensions, which are now largely closed to new members, is uncommon. A report from The Pensions Regulator in 2019 suggested only 13% of defined benefit/hybrid schemes are open to new members. There has also been a shift towards defined contribution pensions.
Defined contribution pensions allow you to build a retirement fund throughout your working life which can then be used to provide an income in retirement; however, unlike a final salary scheme this income is not guaranteed and is dependent on the level of contributions made coupled with investment performance.
The government introduced Auto-Enrolment in 2012 which automatically enrolled new employees into a company pension scheme; this is then funded on a monthly basis with contributions from both the employer and the employee. The current minimum level of contribution is 8% (3% employer and 5% employee, although many employers meet the full 8%). This is a great initiative which has stopped many people opting out of pension schemes and allows the fund to begin to build up over time once an employee is enrolled. However, the eventual pot that is available in retirement is dependent on a combination of the level of funding and investment returns.
The state pension is generally one of the largest secure forms of income an individual can expect in retirement and it is protected by the triple lock guarantee (rising in line with the highest of inflation, wage growth and 2.5%), but this in isolation is unlikely to be enough to meet someone’s expenditure as the cost of living continues to rise.
The Retirement Living Standards have some useful resources online which helps put into context what a minimum, moderate and comfortable retirement could be. They consider how much could be spent on food, holidays, transport, and home maintenance and is an excellent tool to visualise what your retirement may look like.
Benefits of financial advice
Working with a Financial Planner can be really important when it comes to retirement planning for a number of reasons, but primarily the ability to create a financial plan with clear objectives and regular reviews to ensure everything is on track.
A financial plan can analyse your savings, investments and pensions to ensure they are suitable to meet these objectives. Should any changes be necessary, such as a switch of investment strategy, recommendations can be made to alter the arrangements to bring them in line with the agreed objectives.
An important part of planning for the future is the use of a cashflow analysis tool. A financial planner can use this to provide a snapshot of the individual’s current financial situation. This can then help to determine how much an individual may need to contribute to a pension or savings vehicle to reach their retirement goal, over and above the 8% that could be being received via auto-enrolment. A key benefit of cashflow analysis is that it can bring your financial situation to life and spot any shortfalls, so steps can be taken to address them.
It is important to balance to short, medium and long-term goals and there are a variety of products and tax allowances available. A financial planner can help you utilise them to ensure you get the most out of savings, investment and pensions both now and in the future.
The Pension Policy Institute's figures may seem alarming and many retirement plans have been impacted due to the coronavirus pandemic and rising unemployment, but it is never too late to take control of your retirement planning and the use of a financial planner could be useful to help establish a plan, understand your objectives and begin to take the necessary steps to achieve them.
The information given and opinions expressed are subject to change and should not be interpreted as investment advice. All data is sourced by IM Asset Management Limited unless otherwise stated. All financial and wealth management services are provided by IM Asset Management Limited which is regulated by the Financial Conduct Authority (FCA), FCA Firm Reference Number 402770.
Five million older workers face a retirement crisis as they will fall short of an "adequate" income once they leave work, an industry report has warned.