By Dale Critchley, Policy Manager, Aviva
Back then, it was a time when single income families were more common, mortgages tended to have been paid-off before homeowners reached 60 years old, and only a small minority of pension scheme members rented their homes. A single pension was often the sole source of retirement income - in addition to the old age pension - and potentially an individual’s only realisable asset. A house was for living in, rather than investing in or using to fund later life. Life expectancy was shorter too, with a smaller proportion of time during retirement spent in poor health.
Fast forward to today and what we see is far more diversity in scheme membership and the levels of income members need in retirement. Automatic enrolment has resulted in a big increase in the number of savers within lower income and younger age groups. Participation rates, which were as low as 20%, have been transformed. Now, 90% of eligible employees are enrolled into workplace pension schemes.
While the retirement needs of lower income groups might be met to a greater degree by the state pension, the increase in the number of younger savers adds a generational perspective to the diversity of retirement income needs. We can perhaps foresee that the challenge of achieving owner occupancy may be greater for generation Y, potentially bringing people on higher incomes within the cohort of renters in retirement.
Home ownership has a significant impact on retirement income needs. The Resolution Foundation report on the Living Pension published earlier this year found a 50% increase in income was needed by renters in retirement versus homeowners, a stark demonstration of the difference in needs that might exist within a scheme’s membership.
A further factor, which is often difficult to think about when planning for later life, is the cost of social care. A man aged 65 today can expect to live to around 84, a woman until around 86. The number of over 85s is set to double by mid-2041, but healthy life-spans lag behind this growth in longevity. In a sobering statistic, Age UK have identified 1 in 6 people aged over 80 are currently suffering from dementia. Income needs for those of us who need to pay for social care may therefore increase in later life.
A third factor affecting income need is whether people retire as a couple. More ‘dual income’ households mean more ‘dual pension’ households in retirement. The benefit of being able to share living expenses means that retirement income needs may be significantly different for those who remain as a couple, compared to those who divorce. It’s particularly important that during divorce women obtain a fair share of combined pension entitlements, given the Gender Pension Gap. However, increased outgoings are likely to increase the retirement income needs of all divorcees.
The final consideration is how long people sustain income from working. Savers across the board tell us they favour a gradual retirement, perhaps working into later life - subject to physical and cognitive ability and the availability of suitable employment.
It’s clear that the income needs of scheme members are becoming an increasingly individual assessment, as the lives we live become more ambiguous. Aviva’s three rules-of-thumb are useful – start saving 40 years before retirement, save 12% of your salary into your pension each month and aim to save 10 times your annual income. It’s also crucial that pension schemes are designed to give members a fighting chance of achieving a decent level of income. However, it’s also going to take engagement from individuals in seeking out advice and guidance, using planning tools and taking-up the opportunity for a mid-life MOT.
All this can help savers set and review their personal goal for the retirement income they need and want, which is based on their plans, wealth, and ability to adapt to whatever life might throw into the mix.
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