The UK could face a “retirement savings crisis” as workers aren’t putting enough away

Figures suggest that many households aren’t saving enough to be financially secure in retirement. Calculating what income you’d need to reach retirement goals before the milestone could mean you’re in a better position to reach them.

According to a report in PensionAge, only 43% of baby boomer households below the age of 55 are on track to secure a “moderate” income. The Pensions and Lifetime Savings Association define this as £20,800 for a single retiree and £30,600 for a couple.

On top of this, the rising cost of living is likely to mean more people will struggle to meet retirement goals. If retirees hadn’t considered inflation, including periods of high inflation, when calculating their income needs, they could find they have an income gap.

It’s often stated that baby boomers are in a better position financially for retirement. During their careers, defined benefit (DB) pensions, which provide a guaranteed income and are often generous, were more common.

However, this isn’t the case for all baby boomers, who missed out on the introduction of auto-enrolment, which led to a rise in the number of defined contribution (DC) pensions. As a result, many are relying on the State Pension and their savings.

These financial challenges are further compounded for retirees that didn’t get on the property ladder or are still paying a mortgage.

The retirement income gap could widen, even though more people than ever are saving through a pension.

Research from the People’s Pension suggests that 63% of individuals aren’t saving enough to meet their target. This rises to 68% of Generation X workers, who were born between 1965 and 1980, and 76% of millennials, who were born between 1981 and 1996.

The findings suggest that retirement could fall short of expectations for more than half of workers.

Phil Brown, director of policy at B&CE, the People’s Pension’s provider, said: “Once Generation X starts to retire in large numbers, the UK could face a retirement savings crisis, with people unable to carry on with anything like their current standard of living.”

Are you saving enough for your retirement?

Even if retirement is years away, calculating if you’re on track is a worthwhile task. It can help give you confidence and, if you identify a gap, you’re in a better position to close it.

To understand if you’re on the right track for retirement, you need to bring together how much income you’ll need and how much you are saving now.

What income will you need in retirement?

A vital first step is understanding how much income you will need to reach your goals.

Many retirees find that their day-to-day expenses fall – you may have paid off your mortgage or no longer need to spend money commuting. However, discretionary spending may increase, whether you want to indulge in hobbies or hope to visit some bucket list destinations.

While things can change, setting out a retirement budget now can provide a useful guideline when you’re trying to understand if you’re saving enough.

The current levels of high inflation have highlighted why it’s important to think about how your income needs may change over the years.

Usually, the cost of living gradually rises. So, an income that afforded a comfortable lifestyle at the start of retirement may not stretch as far in 20 years. It’s important to think about how inflation will affect your income.

As well as the cost of living, you should consider how unexpected events could affect income needs too.

How will your pension contributions create an income?

It can be difficult to understand how the pension contributions you’re making regularly will translate into a retirement income.

If you have a DB pension, it will provide a guaranteed income in retirement. The income is usually based on your salary and how many years you’ve been a member of the scheme. Your pension scheme can provide the details that will help you calculate your income in retirement.

If you don’t have a DC pension, it can be a little more complicated. Your pension contributions, along with tax relief and employer contributions, are added to a pot and usually invested. As a result, investment performance is likely to affect your retirement savings. When you retire, you will be responsible for using your pension to create a sustainable income.

Often complicating calculations is that you’re likely to have multiple pensions and other assets, such as savings or property, that you intend to use for retirement.

Bringing together your different assets now to understand how they could deliver an income could help you identify potential gaps.

Contact us to talk about your retirement plans

Assessing your retirement savings is an important step to reaching your goals. If you’d like to work with us to understand how your pension contributions and other assets will provide an income later in life, please contact us.

Read more about retirement planning with Skerritts here >