High net worth individuals (HNWIs) in the UK are significantly underestimating how much money they need for the retirement they want, with the average respondent misjudging by around half, according to the latest figures from the Saltus Wealth Index.
Saltus surveyed 2,000 Brits with investable assets of more than £250,000 and asked how much they think they need in their pension pot for a comfortable retirement.
More than a quarter (28%) thought they would need less than £400,000, the majority (65%) thought they’d need between £200,000 and £800,000; on average, respondents thought a pot of £536,000 would be needed, while those over 55 thought they’d need £661,650.
However, savings of £536,000 would actually only provide an annual income of £21,400, rising to £26,500 for a pot of £661,650.
Just 4% of HNWIs realise a pension pot of £1m is needed for a comfortable retirement
According to the Pension and Lifetime Savings Association (PLSA), for a ‘comfortable retirement’ an individual needs an annual income of £43,000, which would require a pension pot of around £1.1m2, excluding the state pension.
Just 4% of respondents said they thought they’d need more than £1million in their pension to achieve a comfortable retirement, meaning 96% are underestimating what they might need.
Furthermore, the actual pension savings of respondents is £484,000 on average, rising to £546,000 for those nearing retirement (55+), which would provide an annual income of £19,000 and £22,000 respectively.
Not only are these pension pots well short of where respondents want their retirement savings to be, but they are also significantly lower than what is needed for a ‘comfortable’ lifestyle in retirement.
This, according to the PLSA, includes one foreign holiday a year, a new car every 5 years, a new kitchen every 10-15 years, £1,500 a year on clothes and shoes, and regular meals out and takeaways.
Even when the new state pension of £11,502 is added3, on average respondents are more than £10,000 a year short of what they would need for a comfortable retirement.
Labour’s Pension Schemes Bill could help plug the gaps
Labour’s recently announced Pension Schemes Bill aims to ‘support over 15 million people who save in private-sector pension schemes get better outcomes from their pension assets’ so could be a welcome boost to those worried they are not on track for a ‘comfortable retirement’.
The Bill’s measures include automatic consolidation of ‘small pension’ pots, which Labour says will cut down ‘loss-making’ pots to maximise income in retirement and the introduction of a standardised test to ensure pension schemes are delivering value and requiring schemes to offer a range of ‘retirement income solutions’. Labour says the package will help boost the average earner’s pension pot my more than £11,0001.
However, these types of measures will only help if people continue to prioritise their pension savings, and according to Saltus’ research, many are already cutting back.
13% have already cut pension contributions and 14% plan to.
On average, respondents are contributing just shy of £3,000 a month into their pensions. However, to reach their retirement goals, they need to be putting in more.
And while two thirds (69%) say they plan to increase their monthly contributions over the next six months, 14% say they plan to reduce how much they pay into their pension over that time period. Worryingly, 13% have already been forced to cut their contributions as a result of the cost-of-living crisis.
Mike Stimpson, Partner at Saltus, said: “Our research highlights some important issues around expectation versus reality when it comes to wealth with a clear misunderstanding surrounding how much money is needed for a comfortable retirement.
“If anything, the perception gap between expectations of what will be needed and what is actually needed could get bigger as life expectancy continues to grow. Living to 100 could become commonplace, and the impact that will have on retirement planning would be huge.
“Labour’s plans to help boost individual’s retirement incomes by consolidating smaller pots and introducing a ‘value for money’ framework could, in theory, help address some of these issues, but in practice, the promise of an £11,000 ‘boost’ should be taken with a pinch of salt.
“Firstly, the plans are heavily reliant on pension schemes having the capacity organise consolidation of all small pots – currently it takes 6-8 weeks to transfer one pension to another, so an automatic system could take years to set up.
“Secondly, the claim that these measures could deliver bigger pensions will ultimately depend on the performance of your investments, so cannot be seen as any kind of certainty, and thirdly, any kind of reform will have trouble making any real difference if people are not able to save into their pensions in the first place.
“Because, despite the fact that the majority of respondents are going to come up short in terms of what they’ll need for retirement, 13% have already cut their contributions, and a further 14% plan to reduce the amount they are putting aside for retirement over the next six months.
“The decision to cut pension contributions should not be taken lightly and it is always best to speak to a financial adviser to fully understand the implications this could have for your plans further down the line.”
