Are you saving 12% of your salary?
A pension association has called for workers to save 12% of their salary into their pension pot and proposed a national retirement income target to help people work out what they’ll need for later life.
A report by The Pensions and Lifetime Savings Association (PLSA) said people know they need to save for retirement but they lack guidance on exactly how much they need to save.
As such, it suggests simple targets and presentations in pounds and pence could help people fulfil their savings needs.
It found that people have a variety of wealth and assets that they’re able to use in retirement and for current retirees, most of their wealth is located within their pension savings, while a minority have substantial property wealth.
Future pensioners, however, will face a number of pressures on their later life income. PLSA said younger generations aren’t accumulating pension and property assets at the same rate as previous generations, and they’re likely to face higher costs in later life than existing retirees.
Further, longer life expectancies, costs of care needs and a higher likelihood of paying rent or mortgage costs in later life will add to the pressure.
‘Disappointing retirement outcomes’
While the association said auto-enrolment has been a major success story, it has also identified grounds for concern: many people think the minimum contribution rates (currently 1% from each the employer and employee) are enough to give them a decent retirement.
As a result, it said, 13 million savers are currently on course for a disappointing retirement. A national retirement income target would therefore offer savers clarity about the costs they’ll need to meet in later life and the money they’ll need for their desired lifestyle.
It suggests the minimum auto-enrolment contributions need to rise to 12% of salary over the course of 2020 and the pension saving scheme also needs to include self-employed, gig economy workers and those with multiple jobs earning £10,000+.
It also wants to explore whether the tax relief savers receive on pension contributions can be modified to help people achieve decent income in retirement. And for those who have substantial equity in their homes, PLSA wants to see measures to improve the flexibility of equity release products.
Jamie Clark, business development manager at Royal London intermediary pensions, said: “The idea of a national retirement income target seems sensible and if it forms part of a strategy that helps and encourages people to engage with their savings, then it can only be a good thing.
“There will still be challenges of course. In particular, people need to understand that they need to review their savings regularly to make sure they remain on track and that their desired level of retirement income when they take their benefits will be sustainable. Financial advisers will normally provide these services to their clients and taking impartial financial advice has been shown to help people achieve good outcomes.”