Five million people over 50 could be facing a "retirement crisis", as they will fall short of what is considered an "adequate" income once they leave work, new research has warned.
More than 90% of private sector workers with a “defined contribution” pension are not likely to be able to afford a comfortable retirement, and will be forced to live on less than their expected income, according to the report, by the Pensions Policy Institute (PPI).
"Fuelled by the COVID-19 pandemic, the situation is ripe for an imminent retirement income crisis, and unless urgent steps are taken to avert this, consequences will be devastating for the UK’s long-term economy," the report states.
The research also warned that millions of over-50s planning to leave their careers could be pushed into poverty and financial insecurity, a situation that has been worsened by the pandemic.
A quarter of those approaching retirement will be left without enough to pay for an “adequate” standard of living, due to factors such as a low state pension and increasing unemployment, warns the report, which was sponsored by the charity Centre for Ageing Better.
An “adequate” retirement has been defined as the ability to maintain living standards in a household from working life through to retirement.
The full basic state pension is currently £137.60 per week, which is just 24% of the national average income, meaning it falls short of providing an adequate income.
Single person households are four times more likely to fall below the minimum income standard, according to the PPI report.
Anna Dixon, chief executive of the Centre for Ageing Better, said action was needed to ensure millions of people approaching retirement did not find themselves without adequate income in later life.
“Many people are at risk of entering retirement with an inadequate amount of savings simply because they are late to saving," she tells Yahoo UK.
"Auto-enrolment was only introduced nine years ago which means many people have worked for decades without making any pension contributions."
Dixon says contribution levels are also low and if you only started saving in your 50s or 60s you don’t have as long for the savings to gain in value.
“This, coupled with the low level of the State Pension in the UK - just 24% of the national average income - increasing unemployment among people in their 50s and 60s as a result of the pandemic, and more people renting in retirement, puts a whole generation at risk of not having a decent standard of living in retirement.
“So, while auto-enrolment is boosting the number of people saving for retirement, it is not sufficient to guarantee financial security in later life.
"We are calling on government and employers to do more to support people to achieve a decent standard of living in retirement and to boost pension savings for those currently approaching retirement.”
How much do you need to save in your 20s, 30s, 40s and 50s to have a comfortable retirement?
According to calculations from Which? if you wait until you are 40 to begin saving for the future, you (and your partner, if you have one) will need to contribute a combined total of £351 per month to achieve a comfortable retirement by the time you reach state pension age.
The figure rises to £1,003 per month if you are aiming for a luxurious lifestyle.
In comparison, if you start saving in your 20s this monthly figure for a comfortable retirement drops to £194 per month, rising to £253 in your 30s.
Meanwhile, those with no savings who wait until their 50s to stash money away will need to contribute a hefty £591 a month.
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What's contributing to the 'retirement income crisis'?
Patrick Thomson, senior programme manager - fulfilling work, at the Centre for Ageing Better, says there are big decisions for many millions of people to make as they approach later life.
"Despite recent reforms to improve the adequacy of retirement incomes, many people are set to be financially ill-equipped for a good later life," he says.
"We know that many leave the workforce earlier than they might like, hitting their ability to save for their retirement. We also know in a tough job market that many people aren’t able to get back into the kind of work that they would like to be in over the age of 50.
"The age group with the highest redundancy rate as a result of COVID-19 is those aged 50 years and over."
So why are so many people not preparing for retirement?
According to Thomson, the evidence shows that those who are living in challenging and precarious circumstances are less likely to plan for later life.
"Unsurprisingly, many who are on a low income, living in rented accommodation and/or working part-time tend to focus on the immediate concerns of the here and now: trying to earn enough money for that next rent payment, struggling to get more hours at work, or juggling multiple caring responsibilities," he explains.
"It is crucial that we consider the wider circumstances of people’s lives when thinking about how to encourage planning, and not assume that those who aren’t engaging in planning are just being ‘irresponsible’."
Thomson says later life can be a great period of our lives, but to make the most of it we need enough money to live on, some good friends to rely on and a suitable home to live in.
"Our research found that while a number of barriers exist, planning and preparing for later life is both possible and likely to be beneficial. While it’s not a silver bullet, there are plenty of things that can be done ahead of time to try and ensure we have a good later life."
George Critchley, chairman of financial planning firm True Bearing, has tips on preparing for your retirement now.
Estimate your expected retirement expenditure
The longer your retirement, the more you will need to have accrued.
"Gaining an insight into the amount you will need to live on while retired will help with your plans in the long-term," Critchley suggests.
"Some costs you may not have considered are increased heating costs, as you will be at home more. It’s also likely that you will spend more on activities and holidays to keep you occupied."
The cost of inflation will also have an impact on your retirement funds. However, there are some areas where you will make savings.
"While you are likely to have less money to live on than previously, bear in mind that you can take off costs that you used to incur but will no longer need to pay out in retirement, this might include commuting, work lunches, and work clothing," he adds.
Work out your likely retirement income
Once you’ve got a solid grasp of your regular expenditure/spending habits, Critchley suggests working out an estimated retirement income.
"This is how much you will have to spend in total once you retire, and you can work this out on a weekly or monthly basis," he says. "Start this as soon as possible, ideally at least two years pre-retirement."
This may involve:
- Getting your State Pension Statement
- Obtaining an estimate on how much you could be entitled to from your workplace pension
- Adding up your savings and investments, including your pension and any other investment funds you may have
- Tracing any lost pensions (you can use the government-run Pension Tracing Service to help you with this)
Explore options that could boost your pension
If your retirement planning hasn’t gone as well as you had hoped and you are now faced with the prospect of retiring with less money than you wanted to, there could be options available to you that will offer a boost to your pension.
"You could start increasing the amount you pay into your pension every month," suggests Critchley. "Alternatively, you could delay or push back the date on which you start withdrawing your pension."
You could also choose to explore other ways to provide income for your retirement.
"You could perhaps even consider continuing to work part-time in retirement, an option that will provide additional income," he adds.