More than two-in-five people in the UK are not confident they will have enough savings to support themselves in later life.
The key reason behind this low confidence is the inability to afford savings on an ongoing basis, followed by worry about paying off their existing debts.
These anxieties could increase through 2022 as the cost of living increases and more people potentially direct more of their financial resources towards short-term goals.
But non-financial reasons are also important, and here employers and the pension industry can help. For example, many people do not know how to plan given the uncertainty about their lifespan, or lack of information about pensions.
And two-in-ten people worry about saving enough given their physical health issues and costs of care they might face in older age1.
Standard Life is part of Phoenix Group, this gives us access to Phoenix Insights. These findings are from the report, The Longer Lives Index: a crisis of confidence - produced by Phoenix Insights2.
For many people there is a significant savings gap in terms of how prepared they are for retirement. Just under 25 million people in the UK (three-in-five people aged 25 to 75) are comfortably on track to save enough to meet their financial goals for retirement - that is, their aspired retirement age and income.
A further 2.5 million people are roughly on track, with a savings gap of less than £50,0003.
This leaves just over 15 million people who are not saving enough to meet their financial goals for retirement.
Perceptions vs. reality
Worryingly, there is a potential disconnect between perceptions and reality for some. More than a third (36%) of people confident about saving enough have a substantial saving gap of over £100,000. This indicates that financial confidence may only be loosely linked to actual preparedness.
This disconnect is not explained by over-optimism among younger generations that might hope to adjust their saving behaviours over time. For those with a savings gap of over £50,000, the average confidence about saving enough to meet one's financial goals increases with age.
Around half of respondents with high confidence and savings gap over £100,000 are aged between 45 and 65.
With respect to older pension savers, these findings were echoed by the report, A Guiding Hand: Improving access to pensions guidance and advice, published by the Social Market Foundation (SMF), and supported by Standard Life, part of Phoenix Group4.
Among people aged 50-64, two-fifths are not confident of being able to meet their desired income in retirement, with 14% saying they are not confident at all, according to the SMF's report. Some 44% said that this lack of confidence was a result of not knowing how much they would need in retirement.
This leaves at least 50% of people - across every income group - saying they are at least somewhat confident they will be able to meet their desired standard of living in retirement.
Yet, again, our analysis suggests that what people think they need in terms of size of pension pot upon retirement, is significantly out of sync with what they will actually need given their desired retirement income.
Across the whole data sample, the average size of pension under-provision - comparing individual expectations of the pension pot needed with what is actually required - is 58%, or around £240,000.
So what can be done to address this apparent misplaced confidence, as well as the deficit in many people's pension pots?
At national level, Standard Life recommends the following changes:
1. Pension Wise needs to be expanded, with a broader scope and new digital tools. Policymakers should explore the case for expanding the scope of Pension Wise in two key ways:
First, providing tailored guidance on the level of pension savings likely to be needed to achieve a given retirement income.
Second, allowing all of those over the age of 40 or 45 with a defined contribution pension to book a Pension Wise appointment, rather than just those over the age of 50 as at present.
2. At a minimum, the FCA should provide clearer information on its current definitions, including more concrete examples of what constitutes "guidance" and "advice". This should include provision of "gold standard" examples of guidance that is highly informative and actionable, without straying into advice territory.
3. Using guidance or advice should be made the default - given the complexity of decision-making at the point of accessing a pension pot. Before accessing their pension pot, individuals should be requested by their pension provider to use some form of guidance and advice, and signpost individuals to a range of options, including online tools.
4. The Government needs to invest significant resource into a nationwide pensions awareness campaign that brings home the need for individuals to prepare for retirement, makes them aware of the complexity of the decisions they face when accessing their pension pot and signposts them to support.
On an individual level, it is vital that people of all ages are supported to quantify how much they will probably need to achieve the lifestyle they want in retirement.
The Pensions and Lifetime Savings Association's Retirement Living Standards can help. The Retirement Living Standards (Standards) allow people to understand pension income in the context of what they'll likely need to spend for the lifestyle they want in retirement.
The Standards will also help employers when trying to support their employees to save and plan more for retirement by:
- Bringing a set of independent and robust Standards based on independent research to use in communications and tools
- Helping to make retirement saving tangible and realistic, so you can encourage savers to engage with their pensions
- Giving savers more confidence about what their savings might buy them in retirement, leading to easier engagement with their savings
Ultimately, the more people feel in control of their retirement plans - the greater their sense of financial wellbeing is likely to be at all stages of their life.
1Whether individuals are on track with their retirement saving depends on several factors, including:
- Savings behaviours: how much wealth they have already accumulated and how much they are saving now
- Financial goals for retirement: the aspects of financial preparedness that determine how much they need to save - including the age at which they want to stop paid work; whether they own a home or will need to pay rent; whether they will have support from others, or need to give support themselves; any health or social care costs they expect; and the level of income they want to achieve in retirement
- Future economic factors such as inflation; any changes in income before they retire; and investment These factors determine how savings will grow before retirement and how much income any savings can support.
- Their individual life expectancy
2The report is based on a new survey of approximately 16,500 people, aged over 25, who are not yet retired. It explores their expectations for and confidence in their financial wellbeing in later life, focused on five critical dimensions: savings; work and retirement age; health; housing; and financial support networks.
3While £50,000 is a substantial savings gap, this threshold is used to indicate those "roughly" on track given the approximate modelling nature of the savings gap. Given this, the focus of this exercise should be on the share of respondents not on track, which indicates a conservative view of those currently not saving enough to meet their financial goals for retirement.
4Based upon a quantitative survey of 2,000 50-64-year-old pension holders.