Employees are under saving for their retirement by as much as a quarter, with women expected to be worst affected, according to research from pension provider Royal London.
The study of 4,000 non-retired people found that the average pension saver hopes to retire on an annual income of £48,868, which includes the full state pension of £11,542.
However, Royal London found that the average worker is on track to miss this target annual retirement income by about £12,000.
The issue of under saving for later life means people will not achieve the standard of living that they want.
Researchers highlighted a theoretical example of a 22-year-old employee with a starting salary of £24,000. If this person puts in the minimum 8 percent pension contributions (employer and employee contributions combined), receives a 2.5 percent annual pay rise and builds up annual compounded investment growth of 5 percent after fees, they would retire at 67 with a pension pot of around £468,000. That is if they’d been paying in since day one.
Researchers said that once you include the state pension, this employee would receive an annual retirement income of around £36,600. This is £12,200 short of the desired £48,868.
Further research from the pension provider showed that 60 percent of workers admit they are probably not saving enough for retirement or don’t know if they’re saving enough.
Clare Moffat, pension and tax expert at Royal London, said: “Many people have an idea of how much they would like in retirement but that doesn’t always match the amount that they have managed to save. This means that they might not be able to retire in the style they wish.
“It’s important to understand how much you need in retirement and the PLSA’s Retirement Living Standards can help with this. Discovering any potential shortfall sooner can give you time to take action to improve your lifestyle in retirement.
“Someone hoping for an annual retirement income of £48,868 would need to build a pot of approximately £696,000, in addition to the state pension.”
Missed opportunities
The importance of the workplace pension benefit is generally understood, with 48 percent of employees reporting that pensions are second only to salary when they assess an employer offer.
However, what is less well understood is the pension boosters that are offered by some employers.
For employees who have been auto-enrolled into their workplace pension scheme, the minimum contribution is 8 percent of their earnings (3 percent is paid by the employer and 5 percent by the employee).
But some employers will pay in more than 3 percent if an employee increases their personal contributions too.
One in ten (11 percent) who were offered the incentive said they didn’t use it. Among people with this benefit option, 44 percent said they couldn’t afford to increase their own contributions, while 24 percent said they didn’t understand it.
The gender pension gap is another issue that will affect future retirement incomes.
Royal London’s research revealed men are twice as likely to have a personal pension compared to women (34 percent vs 16 percent).
Moffat said: “There are many reasons for the gender pension gap, including lower salaries among women, higher levels of unpaid caring responsibilities and the effect of the menopause. If we consider the example above, if the person reduced their hours to 50 percent at age 35 when they had a child and then increased their hours at age 51, instead of a retirement income of approximately £36,600 including the state pension, it would be around £32,000. That’s around £17,000 less than the average pension saver would like.
“However, taking advantage of financial incentives such as employer contributions and salary sacrifice can help. Even small increases in your monthly contributions can have a dramatic increase in the pot you retire with.”
The research is detailed in the Royal London Workplace Pensions Research report.
