The Pensions and Lifetime Savings Association (PLSA) has published new research analysing the incomes different UK generations can expect in retirement. ‘Retirement Income Adequacy: Generation by Generation’ reveals that automatic enrolment will deliver a real improvement in the retirement outcomes of millions of people in the UK, but there is still room for improvement.
Of the 25.5 million people in employment:
- 1.6 million people are still at high risk of falling short of a minimum income standard (MIS) in retirement; and
- 13.6 million people are still at risk of not meeting their target replacement rate (TRR).
Graham Vidler, Director of External Affairs at the Pensions and Lifetime Savings Association commented: “Automatic enrolment is set to deliver a tangible improvement in the retirement incomes of millions of people, but there is still work to do. For younger savers increasing their automatic enrolment contributions from 8% to 12% and working slightly longer puts them on track for their target replacement rate. For older workers, who have less time to save, achieving their target replacement rate may also require a choice to save more and use other assets, such as property, if they have them.
“It is clear from our analysis that minimum contributions under automatic enrolment need to increase to at least 12%. The precise level, the timing of the change and the balance between employer and employee contributions are issues which need to be fully thought through in the light of the effects of increases in contributions due in 2018 and 2019. The 2017 review is an opportunity to start working towards this next phase of automatic enrolment. The success of automatic enrolment to date has been underpinned by wide consensus and support as established by the Pension Commission. To ensure the next phase of automatic enrolment builds on this success the Government should begin by creating an independent commission.”
Millennials: The automatic enrolment generation
This generation will be the first to experience the UK pension system as intended by the reforms of the last decade – the full basic state pension and saving over a full working life through automatic enrolment – but for those in a defined contribution scheme it won’t be enough to get them to a TRR. For them to achieve a TRR they will need higher pension contributions and to work slightly longer.
Generation X: The in-between generation
This generation is caught in between the slow decline of defined benefit pensions and the rollout of automatic enrolment. Many in this generation did not save into a pension during their early working lives and are now saving at a low level through automatic enrolment. Consequently, the jump to achieving TRR is greater for this group than for the millennial group. Increasing pension contributions alone is unlikely to close the gap for this generation – they may need to work longer and utilise other assets, such as property, to generate a higher retirement income.
Baby Boomers: The have and have not generation
Of Baby Boomers who are still working, those who have accrued defined benefit pension entitlement have very good retirement income prospects, but others face a comparatively poor income in retirement. Those without defined benefit may come to retirement with 10 years or less of pension saving through automatic enrolment, meaning they will be mostly dependent on the State Pension. For this group, working later is likely to make a real difference – providing an opportunity to increase the amount they have saved while at the same time decreasing the time they will be dependent on a retirement income. Positively, the majority of this generation has some property wealth, which it may be able to use to generate an income in retirement.