A leading pension think tank has examined this question – but the findings aren’t straightforward.
Over the years, there has been much focus on the tax treatment of pensions and ways to encourage greater saving for retirement. Arguably, there has been less attention paid to the question of how much income you will need once work ceases.
The Pension Policy Institute (PPI) recently published a paper examining what an adequate retirement income means today. The paper notes that the last serious effort to address the issue was undertaken by the Pensions Commission nearly two decades ago, leading eventually to the introduction of automatic enrolment. The PPI makes the following points:
- Individuals, employers, the state and society generally all have differing views on what constitutes adequacy. For example, the state view is set by the Guarantee Credit element of Pension Credit (£177.10 a week for a single person and £270.30 for a couple).
- Changes to the pensions landscape since 2000 have altered the retirement picture both positively and negatively. For example, the new state pension is higher than its basic state pension predecessor, but state pension age has increased (to 66 for men and women) and will continue to increase.
- The demands made on assets originally saved to provide a retirement income have increased, for example:
- For some people, there is a widening gap between leaving work and receiving their state pension, a situation exacerbated by pandemic-prompted early retirements.
- More often now debts, including mortgages, will be carried over into retirement.
- The shrinking of home ownership will see more retirees having to pay rent; and
- There may be a need to support other family members – the Bank of Mum and Dad may not be able to close at retirement.
- The traditional emphasis on retirement income ignores the need to deal with ‘personal financial shocks’, which are better addressed by considering retirement capital.
The PPI says that many people make their retirement planning decisions ‘without support’. It goes on to warn that “As a result, many people struggle to make pensions and savings decisions which offer them the best chance of both achieving their aspirations for retirement and protecting themselves against future risk.”