By Dale Critchley, Workplace Policy Manager, Aviva
The report reveals that those who will depend almost entirely on their pension for their financial future are largely unaware of how much they should be saving. The majority (64%) of those on middle incomes due to retire in the 2050s say that they do not know how much they need to save to achieve their desired retirement income level.
Middle income earners are also in the dark when it comes to thinking about how much they might need to live on when they retire with 6% thinking they can live on £15,000 per year.
When it comes to options in retirement people are equally unaware. The report estimates that in the 2050’s around 3.4 million people could be retiring with a defined contribution pot size of more than £225,000, in today’s values. A number which will increase if initiatives like the abolition of the lower earnings threshold are implemented in time to make an impact on this cohort’s pension pots.
When faced with the prospect of managing a pension pot of over £225,000, more than half of this group (52%) say they “wouldn’t know where to start” when it comes to planning for their retirement. For the vast majority this will be the largest sum of money they have ever had access to. Nearly one in ten said that they would take the whole pension pot as cash, which could leave them with a very large tax bill, be highly inefficient from the perspective of investment returns, and result in a substantially increased risk that they could run out of money in later life.
Pension freedoms allow people to manage their pension income in many ways, but middle-earners lack any real knowledge of the options available. Seven in ten of those set to retire in the 2050s said they had either never heard of drawdown or know nothing about it.
For many retiring in the 2050’s their defined contribution pot is unlikely to provide a luxurious retirement. Without support from government, regulators, and the wider industry, the report reveals a real risk that people may make poorly informed decisions around what remains a substantial amount of money.
The majority of UK adults yet to retire (72%) want unbiased advice; but just one in ten (10%) of those on middle incomes retiring in the 2050s have taken advice.
Aviva has set out seven key actions to help improve levels of defined contribution savings and provide the support these savers need throughout their savings and retirement journey. Advice and guidance are high up on the agenda.
The report also acknowledges the role that the workplace can play in promoting advice and guidance, whether this is through the provision of advice as a workplace benefit or engagement throughout working lives.
It might not seem it but 2050 is not that far in the future. It is close enough to mean the decisions made today will have a real impact on the future finances of those in their thirties and forties today. Revised regulation and the removal of barriers to guidance and advice will allow the pensions industry to provide the support these people need, to make a success of their 2050s retirements.
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