Are you overestimating your pension pot?

11 July 2016

New research reveals how much savers are misjudging their pension needs, with two thirds of women underestimating how much they need in their pension pots.

Britain’s over-50s need double the amount of pension they’ve budgeted for in order to generate a decent income in retirement, according to a new survey conducted by Populus on behalf of Saga. Over-50s were asked to estimate what kind of annual income they’d need from their pension in order to cover a range of different retirement lifestyles, and how much they believed would be enough to deliver the income they want.

A pension for the essentials

To cover the essentials (defined as rent/mortgage and food), over-50s said they’d need an average annual income in retirement of £15,200, estimating this could be generated from an average pension pot of £143,830.

However, according to Saga figures, a pension pot of this size would only generate £7,940 in guaranteed annual income for life for a healthy 65-year old. This gives a shortfall of almost 50%, meaning they would need double the pension pot to meet their retirement income target.

There were also stark differences between men and women – men underestimated what they needed in their pension by 41%, women by 66%.

Saga also calculated how long the estimated pension pot would last in drawdown, where a pension is left invested, the average ‘essential income’ is drawn out annually and the fund grows by 5% per annum, net of fees and charges.

In this scenario, a saver would run out of money after 13 years; a man’s would last 15 years, while a woman’s would last just eight. 

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A pension for a comfortable life

To have a comfortable lifestyle, defined by respondents as being able to enjoy annual holidays, hobbies and regular opportunities to dine out and socialise, an annual income of £21,630 was thought to be required. 

Yet again, however, the actual pension needed to generate that income was double the estimates of Britain’s over-50s, who thought that around £194,000 would be sufficient.

This would only generate a £10,170 annual guaranteed income, leaving a shortfall of around 50%.

For men, the shortfall dropped to 45%; for women, it rose to 63%.

In our drawdown scenario, the fund would be exhausted after 12 years. 

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A pension to keep you in luxuries

It was a similar story for amount of income thought to be needed for a ‘luxurious’ lifestyle, which included going away on holiday frequently and travelling in style, having more expensive hobbies and social activities, such as theatre trips, and frequent home refurbishments.

On average, over-50s said they’d need £46,640 to live like this in retirement, and estimated needing £419,520. In fact, that would only generate £22,720 – leaving a 51% shortfall in income.

In this instance, men underestimated their pensions by 46% and women by 62%.

Drawing down an annual income in our scenario would see a saver running out of money after just eight years.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.