New research by Royal London shows that the cost of living for a pensioner is expected to soar by nearly 150% by 2050
30 September 2015
- Two fifths (40%) of young Brits under 40 don’t believe that the state pension will still exist in 2050
- Today’s 35 year olds need to have saved at least £666,000 by age 65 to secure the same standard of living of today’s pensioners
New research by Royal London, the UK’s largest mutual life, pensions and investment company, ‘Pensions Through the Ages – Generation 2050 and beyond’ shows that the cost of living in retirement is forecast to soar by nearly 150%.
The current average monthly expenditure of a pensioner today, who is not reliant on the state pension, is £1183 a month and this is set to increase to £2930 a month by 2050, an increase of 148%. The figures are based on calculations commissioned by Rofyal London from the Centre of Economics and Business Research, (CeBR) based on the cost of essential items such as housing, food, heating and transport – plus a few added luxuries. This means that today’s average 35 year old, who is halfway to possible retirement in 2050 and who will represent 1 in 4 of the UK population aged 65 or over at that time, will need to build up a fund of at least £666,000 not taking into account any state pension existing at that time. This is to be able to secure a monthly income which will only just maintain the same standard of living of today’s retirees.
Worryingly the research found that today’s 30 – 40 year olds have a median pension pot of only £14,000, well short of the fund they require to secure a monthly income that will just cover the basic £1715 cost of essentials in 2050. Unless this group start to save more, they could face a retirement in poverty.
In addition, two fifths (40%) of people aged under 40 predicted that there will no longer be the financial cushion of the state pension in 2050. Yet nearly half (49%) of today’s pensioners surveyed said that they relied on the state pension and one in five (20%) of them have no income other than the state pension. If the state pension was not available to 35 year old Brits when they retire they may need to save even more to match the potential loss of the state pension.
Commenting on the Pensions Through the Ages research findings, Fiona Tait, Pensions Specialist at Royal London, said:
“The scale of the challenge facing today’s 18-40 year olds to secure an adequate income for their retirement, potentially from 2050 and beyond, is quite frightening. Royal London research highlights the level of income that people should aim to secure for their retirement if they wish to be able to maintain a reasonable standard of living. However, it is very likely that future pensioner spending will be higher than this and so they need to start saving more now. The research shows that median savings pots are £14,000, significantly below the amount needed.”
The Pensions Through the Ages report provides intergenerational insight into the saving and spending habits of today’s retirees, those aged 65–75, compared with those aged between 18-40, who could choose to retire in 2050 and beyond. It outlines some of stark savings challenges facing today’s younger generations and how pensioner spending will change.
Key findings from the report show that:
- Reassuringly 60% of those surveyed aged 30-40 do have a pension in place. This is similar to the number of today’s retirees, as over two thirds, (68%) of those surveyed aged 65-75 said that they have a pension in place. Nearly half, (47%) of 18–29 year olds also stated that they have started a pension. But this does also highlight that potentially 40% of today’s 30-40 year olds don’t have any pension provision in place to secure their future income in retirement.
- Of those in their 30s who have a pension in place, the average age that they started saving for their retirement was 27. In comparison, today’s retirees said that they started their pension savings at an average age of 31, four years later. For those under 30, the research shows that on average they started saving for a pension at age 24.
- The research also established that Brits in their 30s believe that on average they will need 60% of their salary to live on in retirement. In contrast, the reality is that today’s retirees, those aged 65-75 year olds, are on average having to survive on less than half, (48%) of their pre-retirement salary as their income.
- Over half (54%) of 30-40 years olds not saving for retirement say it’s because they can’t afford to and a further one in ten, (10%) believe that it’s too early to start saving in a pension. Worryingly, one in ten, (10%) say it’s because they don’t know enough about pensions and thought it was now too late to start.
- 84% of 18-40s surveyed said that an incentive, where for every £2 they saved they received £1, would be likely, very likely or definitely encourage them to save more.
- One in three, (30%) of those in their 30s and one in five, (20%) of 18-29 year olds have never reviewed their pension or the level of contribution they are making.
- Nearly three in five, (57%) of those in their 30s and over half, (51%)of those aged 18-29 expect to work part-time after they ‘retire’ to supplement their retirement income. Just over 1 in 20 (7%) of today’s retirees said that they currently work part-time.
- The biggest single piece of financial advice that 65-75 year olds would give those in their 30s is to start saving as soon as possible, (27%). 17% said that they would tell them to start to think about the amount of income they may need in retirement. Only 2% would tell a 35 year old to not worry and live for today.
The Pensions Through the Ages research also highlighted that people would save more if they better understood the benefits of saving in a pension and the beneficial effect that the tax incentive will have on their eventual savings.
“The primary purpose of a pension is to provide long term income and too few of the people we surveyed recognise that their income may need to last over 20 years in retirement. The initial stages of auto-enrolment have been successful at increasing the number of people saving, with around 60% saying they have been auto-enrolled into a Defined Contribution, (DC) scheme. This is good news but the level of saving is still not adequate. The research also shows that people do trust pensions, which is one reason why Royal London, in its response to the government Green Paper, has called for pensions with tax relief on contributions to continue to be the main source of people’s future long term savings, rather than ISA-style pensions.
In addition, as the research highlights, over four fifths (84%) of those surveyed said that an incentive would encourage them to save more. Royal London has therefore called for pension tax relief to be at a single flat rate of 33% for all, effectively one pound for every two pounds saved. We believe that this is a fairer system that will help boost the savings of those who have the biggest savings shortfalls.”
Further education on the important role a pension can have in making sure that long-term savings are able to provide a comfortable retirement, rather than relying solely on the state, is crucial. This is where financial advisers alongside pension providers and employers are able to help by improving understanding and creating greater awareness of the need to constantly review pension savings to ensure they are on track to secure the level of income needed.
Outlined below is an easy four step guide by Royal London to help as part of the education required to encourage more people to successfully secure an adequate level of income for their retirement. Details are also included in the Pensions Through the Ages report, available to download from the Royal London media centre:
1. Start saving into a pension as soon as possible
- Saving even a small amount, regularly and as early as possible will help ensure that a person continues to build their savings to the level they need at their chosen retirement date.
- Check whether it is possible to join a pension scheme offered by an employer.
2. Set savings goals
- Be realistic about how much it is possible to put aside on a regular basis.
- Consider at what age a person may want to retire to determine how long they are able to save.
- Be ambitious about the level of income required in retirement to enjoy those special treats.
3. Check the progress of any savings
- Review pension savings at least once a year to check that savings are still on track.
- Review contributions at key points e.g. on receiving a pay rise or a change in financial commitments.
- If not on track or behind target, don’t panic. Consider increasing the level of contributions, which may potentially mean making sacrifices.
- Check the level of state pension available so any shortfall is limited.
4. Consider taking financial advice
- Independent financial advice should be considered where possible, as an adviser will be able to help explain the options available and the most tax effective way to achieve savings goals.
- The Money Advice Service (MAS) or unbiased.com have useful links, which will help to find an independent adviser.
- If using a financial adviser is not possible then there are other excellent sources for guidance on pensions such as The Pension Advisory Service, TPAS or MAS.
Journalists wanting further information please contact:
Berni Ryan Corporate PR Manger
0207 506 6740
Daisy Hall, Director
0207 269 7226
Notes to editors
Sources: Data in the Royal London Pensions Through the Ages report is derived from independent research conducted by Harris Interactive UK Ltd, using a bespoke survey with individuals across a range of age groups. Additional data was sourced from the Office of National statistics (ONS) family Spending report and the Centre for Economic and Business Research (CeBR).
Research conducted by Harris Interactive Ltd
(i) 3,060 UK adults were interviewed online between the 14th August and 19th August 2015.
(ii) The respondents were aged 18-29 (741 respondents); 30-40 (1,186 respondents) and 65-75 (1,133 respondents).
(iii) All 18-40 year olds interviewed were in paid employment.
(iv) Data weighted on age, gender and region to reflect the working population aged between 18-40 and the general population aged between 65 and 75.
(v) Individuals were then recruited from the original study by Harris Interactive to be involved in the case studies detailed in this report.
Data from the ONS Family Spending report
(i) Expenditure for one adult retired household in the UK mainly dependent on state pension and not mainly dependent on state pension, annually between 1978 and 2013.
(ii) Total expenditure is derived from the average household spend on a series of commodities and services over this time frame.
Data from the Centre for Economics and Business Research (CeBR)
(i) Forecast of the spending trends of pensioners over the years from present until 2050 on projected income and CeBR’s long term price projections.
(ii) Income of pensioner households based on income derived from the state pension, private pensions and investment income and how these will change as a result of expected economic growth, inflation, interest rates and earnings growth. The triple lock for the state pension is retained over the forecast horizon.
(iii) Spending forecasts: ONS Family Spending Report data used as the basis for the average pensioner spend for four essentials; fuel and power, food, transport and housing. Changes to inflation, based on CeBR’s projection and the underlying trend rate of volume growth for these essentials are accounted for.
About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with Group funds under management of £83.4 billion. Group businesses serve around 5.3 million policyholders and employ 2,922 people. (Figures quoted are as at 30 June 2015).
The Group is currently moving all of its UK and Ireland life, pension and investment businesses under a new version of the Royal London brand. The Group's independent wrap platform will remain branded Ascentric.