9 January 2019
Laura Myers considers what Future Pensioners might want and need in retirement – and how to pay for it
We’d all like to be comfortable in our old age. Having worked hard all our lives, of course people want a good standard of living in retirement. That could include jetting off to the Caribbean to soak up some sun every now and then or, if the need arises, affording a decent level of care should health decline.
Let’s get some understanding
In my view the key to saving the right amount for retirement is to understand the size of the pension pot you need in order to live in comfort. As our headline here alludes to, ‘living in comfort’ can take many different forms, so savers need to keep their specific goals in mind when thinking about their savings plan.
As my colleague Tim Box pointed out in his recent blog, a pension of £25,000 a year would (if we assume a 20 year retirement period) require savings of £500,000 – quite an alarming figure, most of us would agree!
So, how can you help your DC savers take the first steps towards a comfortable retirement?
Individuals may have different ideas about what a ‘comfortable retirement’ looks like. Whether in the form of an annual break in the Caribbean, which may require £3,000 – or £30,000+ for the safety net of a care home, communicating the best way to save for these retirement goals is vital.
Only when savers know what their end-goal is, can they work out roughly what size of pension pot they need and therefore what to contribute. But they need our help to do this.
This is not an exact science, and because returns are uncertain, saving targets are harder to define for DC scheme members. One thing is clear: at current contribution levels, auto-enrolment alone is not going to get people to their ‘what I want’ number. It is important that financial education for Future Pensioners begins early so that they understand what they need, and what their contributions will become so they can continue to monitor their growing pot, in order to scale up, or pare back monthly contributions, accordingly.
How to save smart
While it’s important to consider what sort of retirement Future Pensioners want, and plan accordingly, of course it’s just as important to be realistic. With many household incomes squeezed, monthly savings need to be at affordable levels – so rather than feel overwhelmed by the pressure to save more, Future Pensioners need to save smart.
One way for Future Pensioners to do this could be to give their pension a bonus if they get one themselves. A great example of this is when savers get a pay-rise, this is a good time to think about increasing pension contributions so that pension savings can be bolstered without feeling the pinch on disposable income. In the US many DC schemes do this automatically – something I think the UK pension industry could learn from.
So whilst there’s no point sacrificing solvency now for fun in the future, it does pay to be aware of what the future might cost. Encouraging members to give their pension a little bit extra where possible along the way will be like them getting a pay rise in retirement. Or it could mean retiring early. And wouldn’t we all want that?
As an industry, we have a responsibility to provide financial education to help Future Pensioners and make sure that members know how much to save. Only with this knowledge will we ensure that savers are doing enough to fund their lifestyle in retirement, whatever their priorities may be.