Four in ten of over 40s have no idea of the cost of retirement

Monday 6 March 2017

  • People struggle to work out size of pension pot they need to see themselves through retirement
  • One in ten think a £25,000 pot will be enough to get them to a basic lifestyle in retirement
  • Saga Investment Services urges the FCA to address lack of access to affordable advice and guidance

Despite the Government’s pension freedoms giving us more control over our money in retirement, new research shows that 40% of people over 40 have no idea of the cost of even a basic lifestyle in retirement, suggesting that more needs to be done to show people how much they need to save in order to be able to afford a decent retirement.1

 

According to research by Saga Investment Services, four in ten over 40s said they had no idea of the cost of even a basic lifestyle in retirement, with women much more likely to say this than men.  When it comes to understanding the size of the total pension pot they would need to fund retirement, 80% of people admitted they no idea how big this would need to be.

 

Experts recommend that people should aim in retirement to have two thirds of the income they enjoy while working in order to have the same lifestyle. The table below shows the real income people would need to achieve a basic, comfortable and luxury lifestyle in retirement and the average estimates people over 40 gave for the annual cost of each of these lifestyles and the total pot they thought they would need to fund this.

 

 

Over 40s Estimate annual cost

Actual Annual cost

Over 40s estimate of total pension pot needed

Actual income of this pension pot size5

Basic Lifestyle (bills, food & little left over)

£13,200

£10,4002

£126,000

£6,904

Comfortable Lifestyle (inexpensive holidays, hobbies & social activities)

£20,500

£18,6003

£244,000

£13,300

Luxury Lifestyle (Expensive holidays and hobbies such as golf and yacht club membership)

£56,600

£64,0004

£500,000

£27,000

 

Although some people are good at understanding the annual cost of these different lifestyles, when it came to translating that into the size of retirement pot they would need people really struggled, underestimating by around 50%.  One in ten thought you could afford a basic lifestyle on a pension pot of up to £25,000, which would pay £987 a year, but on average people thought you could afford this with a pot of £126,000, which in reality would get you just £6,904 a year.  This demonstrates the retirement leap people need to make in order to make up the difference between ambition and reality.  People in the North East are most likely to underestimate the cost of a basic retirement, thinking this could be achieved with a pot of just £74,000.

 

When it comes to affording a comfortable retirement, people on average thought this could be achieved with a pension pot of £244,000, which would actually only give an annual income of £13,300, some £7,000 short of target.  Eight out of ten people said they did not know how big a pension pot you would need to achieve a comfortable retirement.

 

Typically people thought it would take a pension pot of £500,000 to afford a luxury lifestyle in retirement, but this would just pay £27,000 a year, which would leave people two thirds below the real income needed to enjoy a lavish retirement.

 

Sally Merritt, head of product, Saga Investment Services, commented: “The research proves just how desperately affordable advice and guidance is needed and we urge the FCA to address this.  It is a real concern that people in their 40s and beyond are so unaware of what they need in their pension pot to give them the lifestyle they want in retirement.  People are in danger of becoming pothole pensioners, who face a bumpy road ahead because they didn’t invest well enough when they had the opportunity. 

This could well be because people underestimate how long they are going to live in retirement, or that they simply don’t understand what sort of income a typical pension pot can generate.  Our survey demonstrates how important it is for people to take the time to think about their savings and investments as early as possible to give them time to put a little more away if they think they are not going to have as much as they need.

“But the task need not be as daunting as people think, in just half an hour on a computer with the right paper work in front of them our  free, personalised Look Ahead report can give people an accurate view of where they are with their retirement finance planning and make suggestions as to what else they might consider in order to achieve their goal.”

Ends

Notes to editors

1 Populus surveyed 1,641 people aged 40 and over and not retired online between 3rd and 9th February 2017. Results have been weighted to be representative of all GB adults. Populus is a member of the British Polling Council and abides by its rules. For more information visit www.populus.co.uk

2 National living wage from April 17 £7.50, calculation based on working 40 hours per week

3Average uk salary is £28,000, based on average weekly earnings of £539 reported by ONS - ttps://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/annualsurveyofhoursandearnings/2016provisionalresults

4 According to HMRC data, people in the top income decile in the UK earn £95,600.   

Table 2.C: Median gross income for each quintile (£ per year, 2019-20) for different household compositions

Median gross income of households in decile

1 adult (£)

1 adult and 1 child (£)

2 adults (£)

2 adults and 1 child (£)

2 adults and 2 children (£)

Top decile

66,700

93,700

95,600

124,500

159,200

Ninth decile

42,800

57,300

62,700

81,900

100,300

Eighth decile

33,700

49,600

49,400

65,300

81,000

Seventh decile

28,000

41,500

40,800

54,300

65,900

Sixth decile

23,100

34,000

34,600

45,600

56,300

Fifth decile

19,800

26,900

29,400

38,800

47,300

Fourth decile

16,400

22,100

25,100

32,700

40,100

Third decile

14,300

18,700

21,400

28,000

33,300

Second decile

11,800

15,100

18,100

23,700

26,600

Bottom decile

8,900

12,500

13,700

16,900

20,000

Source: HM Treasury microsimulation model

5Figures derived from annuity calculator provided by the Money Advice Service, for a healthy 65 year old purchasing the best available level annuity with the entire estimated pension pot.

About Saga Investment Services

Saga Investment Services has been developed to open up the world of investing and financial planning to the UK’s over 50s in the run up to and throughout retirement, and to make the process as simple and stress-free as possible. Customers can invest from just £100, and have access to investment advice and financial planning services. Saga Investment Services champions a straight forward and transparent approach to investing, and is a proud member of the Plain English Campaign. It is a joint venture between Saga, the leading provider of services to the nation’s over 50s, and Tilney Bestinvest, the expert investment and financial planning group.

Saga’s ‘Look Ahead’ retirement planning tool

Britain’s over 50s can take control of their retirement plans in three easy steps with Saga’s Look Ahead tool. This interactive online retirement planner allows people to get a more realistic look at how their money will last, and the steps they can take to maximize their savings.

Step 1: tell the tool what you have saved. From defined benefit ‘final salary’ pensions, private pensions and your forecasted state pension, along with other sources of savings and income, stocks and shares ISAs or rental income, you tell us what you’ve got saved up. The Saga insights in the tool help you extract the right information from your statements and papers.

Step 2: tell the tool how much retirement income you want and how you want it; guaranteed, flexible or both. The tool produces a ‘smart chart’, showing the the breakdown of all your different income sources over time, including those that are guaranteed, inflation-linked or variable; growth projections based upon how much risk you want to take. The tool indicates whether or not you have enough to reach your income goal and what age your savings might run out; and a traffic light system with suggestions on how you can adapt your investment strategy to generate a better income.

Step 3: Download your free report. Saga Investment Services has designed its new ‘Look Ahead’ tool to give as much support to over 50s as possible as they plan their retirement. So as well as offering people a simple online journey to finding out how much they could generate in retirement, users will receive a free downloadable report, written in plain English7, which breaks down their financial picture into bite size chunks. And support will be offered via telephone and live web chat for those that don’t feel confident using the tool online.

Visit www.sagainvestments.co.uk/lookahead to use the tool.

IMPORTANT INFORMATION

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested.  This press release does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Past performance is not a guide to future performance

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