Five million over-50s 'sleepwalking' into a retirement crisis
Nine in 10 workers will not be able to afford a comfortable retirement
Five million older workers face a retirement crisis as they will fall short of an income once they leave work, an industry report has warned.
More than 90pc of private sector workers with “defined contribution” pensions will not be able to afford a comfortable retirement, and will be forced to live on less than their expected income, according to research by the Pensions Policy Institute, a think tank.
Millions of over-50s planning to leave their careers could be pushed into poverty and financial insecurity, a situation that has been worsened by the pandemic.
The report, which was sponsored by the Centre for Ageing Better, a charity, warned a low state pension and increasing unemployment were key factors that would leave a quarter of those approaching retirement without enough to pay for an “adequate” standard of living.
A large number of over-55s were forced into leaving work early during the pandemic and redundancies have been higher for older workers versus all other age groups throughout the crisis.
Meanwhile, the full state pension, currently £9,350, pays just 24pc of the national average income, which means it falls short of providing an adequate income.
The Government’s “triple lock”, which guarantees the state pension rises by the highest of inflation, wage growth or 2.5pc, has been branded “worthless” as millions of pensioners struggle to cope with rising living costs. The Government has been urged to build a new mechanism to ensure the state pension rises quickly enough.
Single person households are four times more likely to fall below the minimum income standard, according to the PPI report. More than one in three people have meanwhile retired with unpaid debts, averaging £17,500, according to a survey by Key Retirement Solutions, an equity release firm.
Just one in three people can expect a “moderate” life in retirement, which is equivalent to £20,200 a year in income, according to the Pensions and Lifetime Savings Association, a trade body. This income would allow them to cover all the basics and to go on holiday in Europe for two weeks a year, as well as eat out a few times a month.
Double the minimum pension contributions
Future generations are equally at risk of falling short of an “adequate” income in retirement, as the minimum contributions made through auto-enrolment are insufficient. The PPI and Centre for Ageing Better urged the Government to double the current minimum contribution to 16pc of wages to ensure workers were saving enough.
The Government's auto-enrolment policy, first introduced in 2012, has been successful in getting more people to save as it means that all workers have been automatically enrolled in company schemes unless they opted out.
Daniela Silcock, of the PPI, said the “stark” figures showed how urgently those saving today needed an accessible and achievable target. There had been no single standard of what an "adequate" income in retirement was and how much pension wealth that required, she said.
“Action from the Government to pursue this agenda will be necessary soon, to help prevent future generations of older people experiencing poor retirement living standards,” Ms Silcock said.
Anna Dixon, of the Centre for Ageing Better, said action was needed to ensure millions of people approaching retirement and generations to follow did not find themselves without adequate income in later life.
An “adequate” retirement has been defined as the ability to maintain living standards in a household from working life through to retirement.
Money Makeover: 'How do I spend my £520k pension without paying any tax?'
Hugh Hamil will pay income tax if he withdraws more than £12,570 – but there is a solution
The newly retired face a daunting task. With no salary, they must adapt to a new way of living, determined by how much they saved while they were working and what the Government will provide.
Hugh Hamil, 63, has just joined this group. A retired chauffeur from Watford, Mr Hamil has accumulated a £520,000 retirement pot, split between a £270,000 self-invested personal pension and a £250,000 Isa. He will get the full state pension when he turns 66, currently worth £9,340 a year.
With three years before he receives the benefit, he must carefully plan how much he spends and which pot he uses for income. He wants to keep his tax bill to a minimum.
“I want to start drawing from my pension, but I am not sure what the most tax-efficient way of doing it is. I don’t know how much money I should take out and from which pot. I need a plan before my state pension starts,” he said. Mr Hamil has already taken his 25pc tax-free lump sum and put it into his Isa, investing it himself.
“I don’t want to pay the 1.5pc fee to a financial adviser to help me pick investments. I used to discuss funds with people at work and follow the ideas of colleagues. This has stopped now because I’m no longer working, so I’d like some help picking funds,” he added.
His Isa is dominated by three funds. His top holding, Fundsmith Equity, has £34,000 invested. HL Select Global Growth Shares, a global stocks fund managed by his stockbroker Hargreaves Lansdown, has £29,000 invested, and he also has £25,000 in Vietnam Enterprise Investments, a specialist investment trust.
His Sipp is even more concentrated. Mr Hamil has £100,000 in HL Multi-manager Balanced Managed Trust, which invests in a range of stock and bond funds, and £156,000 in the Smithson investment trust, managed by Terry Smith’s Fundsmith group, which invests in small companies.
Mr Hamil expects to spend around £2,000 a month before treats such as holidays are taken into account. He has no debts and owns his property. He lives with his wife, who works part-time and earns £12,000 a year. Telegraph Money looks at how he can generate the income he wants.
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