Making sure you’re on track to retain your lifestyle in retirement

Posted on November 5, 2019

Do you feel like you just go to work day in, day out, with the weeks quickly turning to months and the months to years?

If that’s the case, you may be going through life with a vague notion that your pension contributions will be enough to give you a comfortable retirement without having done any precise calculations of late.

Unfortunately, this means you could be on track for a significant shortfall.

The pension and investment provider, Aegon, warns that members of Defined Contribution (DC) schemes will find that their retirement income will fall short of their expectations if they simply rely on the minimum automatic enrolment contributions and the state pension (currently £8,767).

According to the insurer’s findings, most DC savers will need to increase their contributions to ensure they enjoy a similar lifestyle in retirement to their current one. It’s, therefore, worth taking stock as early as possible to find out how much more money you need to save.

The figures Aegon used came from the government’s 2017 auto-enrolment review and highlighted broad target replacement rates (the percentage of an employee’s pre-retirement monthly income that they receive each month after retiring).

Someone earning an average salary of £27,000 would need a 67 per cent replacement rate to maintain their lifestyle from pension savings of £303,900. They would require an income of approx £18,000 per annum in today’s money to continue to live in the way they were accustomed.

On top of the state pension of £168.60 a week, a 22-year old earning £27,000 would need to contribute an additional 4 per cent to the current 8 per cent minimum combined contribution to reach their required monthly income. Failure to do so could result in a shortfall of £106,500. The extra contribution required would increase with age to:

13 per cent more for a 35-year old
29 per cent more for a 45-year old

These figures are based on individuals just being in auto-enrolment schemes and having no existing pension pot. The additional percentages may sound steep but it’s worth remembering that some employers will also match your contributions. What’s more, with tax relief from your own employee contributions, it could cost as little as 1.6 per cent from your take home pay to reach the 4 per cent specified.

The key message is to take stock now. Think realistically about how much you will need to get close to maintaining your lifestyle once you retire. If a shortfall looks likely, explore the option of paying more than the automatic minimum as early as possible. The longer you wait, the harder it will be to catch up.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.