Many middle aged savers face a bleak old age on low incomes, new research suggests.
Nearly one in three people aged 40-55, dubbed Generation X, are saving inadequate sums and will achieve only a minimum standard of living in retirement, while one in four will rely on the state pension or have no savings at all.
Some 60 per cent of people in this age group with defined contribution pensions are running the risk of not reaching a modest income in retirement, according to research by the International Longevity Centre carried out for Standard Life.
Middle aged savers missed out on auto enrolment in their early careers and have weathered two financial crises – when some will have faced periods of unemployment – in the middle of their working lives.
Final salary pensions, which used to provide a relatively generous and guaranteed income in old age, have been replaced by stingier ‘defined contribution’ pensions where workers bear the investment risk.
The state pension is currently worth £9,300 a year for those who have a full National Insurance record.
>>>How to sort out your pension: Read more here and scroll down to the box below
The ILC definitions of what savings are adequate to give people a minimum or higher standard of living are below.
The current auto enrolment minimum going into pensions is 8 per cent of earnings between £6,240 and £50,270 a year – made up of worker and employer contributions and government top-ups.
What are defined contribution and final salary pensions?
Defined contribution pensions take contributions from both employer and employee and invest them to provide a pot of money at retirement.
Unless you work in the public sector, they have now mostly replaced more generous gold-plated defined benefit – or final salary – pensions, which provide a guaranteed income after retirement until you die.
Defined contribution pensions are stingier and savers bear the investment risk, rather than employers.
The ILC found:
– Some 44 per cent of people aged 40-55 with defined contribution pensions have gaps of at least 10 years in their contributions, rising to 48 per cent for women
– More than a quarter, or 28 per cent, will mostly or solely rely on the state pension to fund their retirement, or don’t have any pension savings at all
– Only 7 per cent are saving enough – defined as 21.3 per cent of salary – for a moderate lifestyle in retirement.
Meanwhile, some 23 per cent expect to have other sources of wealth to generate income in retirement.
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More than half of this group said they would have one of the following assets to lean on later in life.
– 26 per cent have other savings and investments
– 25 per cent expect an inheritance
– 23 per cent plan to downsize or release equity from the property they live in
– 14 per cent will have support from a partner or family member
– 11 per cent have other property investments
The ILC surveyed more than 6,000 people aged 40 to 55 last autumn, and the figures were weighted to be representative of all UK adults in this age group.
The organisation suggested several ways to improve the outlook for middle aged people in retirement, aside from simply urging them to save more on their own.
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These include increasing minimum pension contributions via auto enrolment, and introducing some flexibility by allowing people to temporarily pay into their pensions at a lower rate if they are struggling financially.
Workers could be encouraged to save more when they have paid off large debts like a mortgage or student loan, and their contributions could be automatically increased when they receive a pay rise or after a certain number of years of saving.
The ILC also suggests the Government introduce a flat-rate of pension tax relief at 30 per cent, rather than base it on income tax rates.
The Government is reportedly considering this again, but the idea is controversial because although it would boost the contributions of lower earners it would reduce top-ups to the better paid, and break the principle that everyone pays into a pension from untaxed income.
How much do you need to save for a decent retirement?
The following savings adequacy measures were used in the research by ILC.
The percentages of full time earnings used include worker and employer contributions and government top-ups via pension tax relief.
Minimum contributions under auto enrolment total 8 per cent.
Minimum standard of living: This is enough to cover basic living costs but not enough for individuals to have financial security and the flexibility to do many of the things they might want to do. The contribution level estimated as necessary to achieve this is 8 per cent of average full-time earnings (likely a combination of employee and employer contributions).
Modest standard of living: This is between a minimum and a moderate standard of living. The contribution level estimated necessary to achieve this is 16 per cent.
Moderate standard of living: This provides some level of freedom and resilience to shocks. The contribution level estimated necessary to achieve this is 21.3 per cent.
Sophia Dimitriadis, research fellow at ILC and author of the report ‘Slipping between the cracks’, says: ‘There’s still time to support the retirement prospects of Generation X and alter their current trajectory.
‘But with the oldest members of this generation retiring in just over a decade, we will need to act fast.
‘The majority of people with DC pension savings are chronically under-saving, and with many Gen Xers too overwhelmed with other priorities – like caring responsibilities and the additional pressures from the pandemic – it is vital that the Government builds on the success of auto-enrolment to support people to reach an adequate retirement.
‘With many Gen Xers facing often temporary financial pressures – the most effective solutions will offer some flexibility and tap into moments when people have a bit more money.
‘In the meantime, we urge Gen Xers to play their part by trying to capitalise on moments where they can afford to save more – such as following a pay rise or a decrease in mortgage payments to increase their pension contributions.’
Andy Curran, chief executive of Standard Life, says: ‘Many Generation Xers don’t have adequate pension savings in place, and sadly face financial vulnerability in retirement.
‘Many entered the job market too late to take full advantage of final salary pensions, yet too early to enjoy the full benefits of initiatives like auto-enrolment, and their retirement income will be stretched as a result.
‘To address this, we would encourage employers to consider mid-life MOTs, to help people take stock of their finances and support them with planning for later life.
‘At the same time, we’d also urge Gen Xers to regularly review their annual spending and engage with their finances as early as possible to gain a better understanding of what they’ll need in the future.’
How to sort out your pension if you fear it’s falling short
If you are worried about your pension and whether you will have enough, read a full 10-step guide to sorting it out here.
To get started, investigate your existing pensions. Broadly speaking, you need to ask schemes the following:
– The current fund value
– The current transfer value – because there might be a penalty to move
– Whether the pension is in a final salary or defined contribution scheme
– If there are any guarantees – for instance, a guaranteed annuity rate – and if you would lose them if you moved the fund
– The pension projection at retirement age.
You can use a pension calculator to see if you have enough – find This is Money’s here.
You should add the forecast figures to what you anticipate getting in state pension, which is currently £179.60 a week or around £9,300 a year if you qualify for the full new rate.
Get a state pension forecast here.
If you are tempted to merge your old pensions, check out some tips on how to decide here.
If you have lost track of old pensions, the Government’s free tracing service is here.
Take care if you do an online search for the Pension Tracing Service as many companies using similar names will pop up in the results.
These will also offer to look for your pension, but try to charge or flog you other services, and could be fraudulent.
Women, who tend to miss out because they get lower pay and do unpaid caring work, can find out how to increase retirement savings here.