Eight out of 10 savers have absolutely no idea whether they are saving enough for a comfortable retirement, according to a new report from the Pension and Lifetime Savings Association (PLSA).
This means that as many as 30.4million working age people are not confident that they will be able to afford the lifestyle they want when they retire.
The report, ‘Hitting the target: a vision for retirement income adequacy’, found that although 34% of savers could afford to put more money away, uncertainty about how much they will need when they retire is putting them off.
Under auto-enrolment rules the minimum contribution for workplace pensions is 5% (based on employee and employer contributions as well as tax relief), rising to 8% in April 2019. However more than half (51%) believed that this was the government’s ‘recommended amount’, while 44% incorrectly thought that this level had been set to ensure they will have enough money saved for retirement.
As a result of its findings, the PLSA says more needs to be done to help people better understand pensions and how much they will need to save to maintain their lifestyle. Currently half of savers (51%) say the do not have enough time to plan for their financial future, while 74% said they would find it easier if they had so-called retirement income targets.
Retirement income targets were introduced in Australia in 2017, with the Association of Superannuation Funds of Australia setting out the lump sums required by singles and couples to have both ‘comfortable’ and ‘modest’ retirements.
The PLSA also wants to see minimum contributions under auto-enrolment increased from 8% of ‘band earnings’ (currently £6,032 to £46,350) to 12% of total salary between 2025 and 2030, with contributions from employers boosted to at least 50% of this to ensure it remains affordable for savers.
Other recommendations from the PLSA include increased support at retirement to help savers make the right income decisions for them and making it easier for retirees to use income from other sources, such as their home or remaining in work. The pensions industry should also develop new ways of assessing whether schemes offer good value for money and are properly managed.
Nigel Peaple, director of policy and research at PLSA, says: “Millions of savers are in the dark about whether they’re on track for the lifestyle they want in retirement. With future generations unlikely to have the same levels of property wealth, or final salary pensions, as current retirees do, it’s vital more is done to ensure people can cover the costs of later life.
“We want the government, pensions sector, and regulators to work together to take forward our recommendations and help many more people achieve the retirement they desire.”
The idea of introducing retirement targets has been widely welcomed by experts.
Tom McPhail, head of policy at Hargreaves Lansdown, says: “This report captures a lot of the key thinking on how to move forward with pension policy from here. You can’t expect investors to hit a target if they don’t know what they’re aiming at. This central proposal to develop simple targets for people to engage with will enjoy widespread support from across the pensions industry.
Tom Selby, senior analyst at AJ Bell takes a similar view and believes that without further action from the government, savers will “sleepwalk into a retirement disaster”.
He says: “The idea of setting retirement income targets could help jolt those who are not saving enough into action. With the government already investigating creating a mid-life MOT to help savers navigate their retirement options and the FCA recently setting out improvements to the way people receive information about their pensions, it feels like a long overdue drive to boost engagement is beginning to gather momentum.”