Britons could retire six years earlier if they increase their pension contributions, according to new analysis by Standard Life. The savings firm found that adding 3% to personal contributions could close a “retirement expectation gap” and bring forward retirement age.
Retirement planning gap
Research by Standard Life showed “a clear relationship between retirement planning” and the gap between expected and desired retirement age. “Those who have done ‘a great deal’ of retirement planning have a gap of just 2.5 years, compared with 7.3 years among those who have done none,” the savings firm added.
“Even among those on the lowest household incomes (under £30,000), people who have engaged in financial planning expect to retire 1.6 years earlier than those who have done none, and more than two years earlier than non-planners earning £30,000 — £100,000. Among the highest earners (over £100,000), those who have planned have a gap of just 0.6 years, compared with 5.1 years among those who have not.”
Example of a 22-year-old worker
The company used an example of a 22-year-old worker earning £30,000 reaching retirement age at 68 with a £252,000 pot. If they added 3% extra via their personal contribution — combined with 8% from their employer — the same worker can retire at 62 with a £270,000 pot, six years earlier, Standard Life outlined.
“Starting early can also make a significant difference,” the firm said. “Someone who starts work at 22 on a salary of £30,000 and pays minimum auto-enrolment contributions (5% employee, 3% employer) could build a £252,000 pension pot by 68 in today’s prices. However, increasing contributions by three percentage points could allow them to retire at 62 — their preferred retirement age — with a slightly larger £270,000 pot, allowing for inflation.”
“While this could help bring retirement plans closer to reality, retiring earlier also means funding a longer retirement and bridging a longer gap until State Pension income starts, which can have significant impact on your retirement pot, making forward planning even more important.”
Expert comment
Catherine Foot, the director of the Standard Life Centre for the Future of Retirement, said: “This year’s Retirement Voice findings point to a noticeable shift in how people are feeling about retirement. The age people would ideally like to retire hasn’t changed, but the point at which they think they will actually be able to stop work is drifting further away. That is happening as the State Pension age itself begins its phased rise from 66 to 67, and against a backdrop of renewed pressure on household finances and a wider sense of economic and global uncertainty. Together, these factors risk making retirement feel less certain and more distant, rather than a milestone people can plan towards with confidence.”
The firm highlights that this is assuming 3.50% salary growth per year and 5% a year investment growth. Figures account for 2% inflation, it added, and an Annual Management Charge of 0.75% is assumed. The figures are an illustration and are not guaranteed, the company said, and earning limits are not applied. Pensions can go down as well as up and are not guaranteed.
Ms Foot added: “Renters, women and younger generations, as well as those living in the North East, are among those furthest from the retirement they would ideally like, while many people also question whether working into their late 60s or beyond will be physically or practically possible. As the State Pension age rises, that should be an important consideration for policymakers. A sustainable retirement system cannot simply assume that everyone will be able to solve an adequacy problem by working for longer. There is, however, a positive message for individuals. The findings show a very clear relationship between planning and people’s retirement expectations, even among those on lower incomes. Starting earlier, understanding what you already have and, where affordable, increasing pension contributions can make a meaningful difference. For many people, relatively modest action now could help bring the retirement they want considerably closer. At the same time, individual action can only go so far, and this report underlines the scale of the opportunity presented by the next stage of the Pensions Commission to shape the adequacy of pension saving and consider the long-term future of the UK’s pension system.”
“Employers also need to consider how careers can become more flexible as working lives lengthen. The goal should be a system that gives people greater confidence and is fair to the people who live with it, giving them choice over when and how they retire, rather than having a later retirement as the default because they feel they have no alternative.”
