Retirement Plan: What Lifestyle Do You Want and Can You Afford It? Find Out Below
Many top earners face retirement shock as they save only enough for a mediocre lifestyle without luxuries or aspirational travel in old age, a new study shows.
Almost 70 per cent of households with an annual income of around £77,000 or more are on track to have at least a moderate retirement.
Nearly 40 percent are saving enough to reach a higher level and finance a comfortable life.
A single person needs £25,000 a year and a couple £36,480 a year to achieve a moderate standard of living once they stop working, according to the Hargreaves Lansdown study.
That rises to £38,662 a year and £58,480 respectively if you’re aiming for a more comfortable retirement, he calculates.
In the general population, about 38 percent of households are on track to earn a moderate retirement income and 18 percent are on track to earn a comfortable one.
“More than two-thirds of higher-income households are on track to earn a moderate retirement income,” says Helen Morrissey, director of retirement research at Hargreaves Lansdown.
“At first glance it looks good, but if we investigate a little further, we are in for an unpleasant surprise.”
She says the reality is that people with higher incomes will be used to spending much more than they could spend at a moderate level of income.
“This means many are faced with tough decisions unless they can start to plug the shortfalls in their Sipps and workplace pensions.”
Hargreaves’ figures on the income levels needed to achieve these lifestyles are based on Retirement Living Standards of the Association of Pensions and Life Savingsbut they are lower than those usually cited.
That’s because the PLSA included more aspirational elements, such as day trips, this year after its research showed people have a greater desire to spend more time with family and friends following the pandemic.
As a result, incomes necessary for a moderate lifestyle in particular skyrocketed.
Helen Morrissey: Many high earners face tough decisions unless they can start to cover shortfalls in their SIPPs and workplace pensions
Hargreaves therefore went back to PLSA’s revenue figures from the previous year and increased them by CPI inflation to arrive at new figures that he believes better reflect the rise in the price of goods.
However, like the PLSA benchmarks, they assume you qualify for a full state pension, which rose to £11,500 a year in April.
And the figures don’t include income tax, housing costs (if you rent or are still paying a mortgage) or care expenses.
Hargreaves’ study was based on its Savings and Resilience Barometer, produced in collaboration with forecasting firm Oxford Economics.
It is based on data from the Office for National Statistics’ Wealth and Assets Survey, which draws on information from 10,000 households, plus other data from official sources.
How to Increase Your Retirement Savings
There are things you can do to help bridge the gap between what you’re saving and what you need for a comfortable retirement, regardless of whether you’re a high earner or not, says Helen Morrissey of Hargreaves.
Here are their tips. Scroll down to find our checklist for organising your pension.
1. Take the opportunity to increase your contributions every time you get a new job or a pay rise, this will increase your pension over time.
High-income earners will benefit from a 40 percent, or even 45 percent, tax reduction on contributions.
2. If you receive a bonus, contributing part of it to your pension can also make a big difference. Your employer may also add National Insurance savings.
3. It is worth checking whether your employer is willing to contribute more to your pension if you increase yours.
This is known as the employer contribution and, if it is available and you have extra money, it is a great way to add significantly more to your pension without necessarily having to contribute much more.
4. Plan ahead: Think about when and where you would like to retire. Income goals can be very useful in helping you think about what you want your retirement to look like and how much it will likely cost.
5. Don’t forget it State Pensions: Request a free forecast.
6. Locate missing funds that can add thousands of pounds to your total pension (read more about this below).
7. Consolidation has benefits, as it allows you to have a global view of what you have.
Importantly, you need to make sure you don’t incur costly exit fees or lose out on useful benefits, such as guaranteed annuity rates, by doing so.
8. Use pension calculators to see how much income you are on track to receive and model the impact of investing more if you are behind.
How to put your pension in order if you fear that it won’t be enough
1) If you are worried that you have not saved enough, Research your existing pensionsIn general terms, the following questions need to be asked of the schemes:
– The current value of the fund.
– The current transfer value – because there could be a penalty for moving it.
– Whether the pension is a final salary or defined contribution pension. Defined contribution Pensions take contributions from both the employer and the employee and invest them to provide a pot of money at retirement.
Unless you work in the public sector, they have now mostly replaced the more generous gold-plated watches. defined benefit – career average or end-of-career salary – pensions, which provide a guaranteed income after retirement until you die.
Defined contribution pensions are more stingy and savers bear the investment risk, rather than employers.
– Whether there are any guarantees (for example, a guaranteed annuity rate) and whether you would lose them if you moved the fund.
– Your pension forecast at retirement age. You can use a pension calculator to see if you will have enough; these are available online.
2) You need to add the predicted figures to what you expect to receive in state pension, which is currently £221.20 per week or around £11,500 per year if you qualify for the new full rate. Get a state pension forecast here.
3) If you are tempted to merge your old pensions, read our guide first to make sure you won’t be penalized.
4) If you have lost track of the old pots, The Government’s free pension tracking service is here. Our retirement columnist, Steve Webb has a guide to finding lost pensions here.
Be careful if you do an online search for Pension Tracing Service as many companies using similar names will appear in the results.
These will also offer to look for your pension, but they will try to charge you or sell you other services, and they could be fraudulent.
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