PLSA proposes national retirement income targets

In 2017, the Association of Superannuation Funds of Australia set the lump sums required for a single retiree and a retired couple to achieve a comfortable retirement at AUD545,000 (£321,119) and AUD640,000 (£377,086) respectively. 

Australians seeking a modest retirement needed a lump of AUD50,000 (£29,461) if they were single, or AUD35,000 (£20,623) as a couple. According to the ASFA, these figures were significantly lower because the base rate of Australia's state pension, along with pension supplements, is sufficient to meet the expenditure required at this budget level.

The new report by the PLSA, entitled ‘Hitting the Target – Delivering Better Retirement Outcomes’, calls for the development of income thresholds pertaining to minimum, modest and comfortable standards of living.

According to the paper, 77 per cent of people confessed to not knowing how much they will need to have saved for their retirement. Four-fifths of those surveyed said RITs would aid their retirement planning.

The body’s consultation will examine changes to automatic enrolment, tax relief, contributions, career longevity and engagement strategy as ways of helping savers reach these income targets.

Savers will set their own targets

The PLSA has not formalised defined RITs in its paper. In response to the consultation, 55 to 64-year-olds said a retiree could survive on a minimum of £10,000-£15,000 a year.

They set a modest lifestyle on £15,000-£25,000, and a comfortable retirement based on an income of more than £25,000 a year.

Nigel Peaple, deputy director of defined contribution, lifetime savings and research at the PLSA, emphasised the need for RITs to be customisable for individual savers.

“In a way, a single target will be wrong for every individual, yet general targets are quite useful for most people,” he said. As an example, he suggested that these could be adjusted in accordance with regional factors, such as property prices.

The paper put forward an “increase [in] minimum automatic enrolment contributions from 8 per cent of band earnings to 12 per cent of salary over the course of the 2020s, once the experience of raising auto-enrolment contributions from 2 per cent to 8 per cent is well understood”.

Peaple said: “We all understand the importance of people saving more. We also understand people find it difficult to find the money… I think that is one of the most important [proposals], because it’s about getting the money in. That, plus the targets themselves.”

Retirement can be funded by more than a pension

The body will examine ways for the pensions industry to help savers convert property wealth into retirement income. According to the report, 74 per cent of pensioners have property wealth, with a median value of £100,000.

Darren Philp, director of policy and market engagement at mastertrust The People’s Pension, said: “A lot of people may have a lot of equity in their house. How best can that be used as part of the wider assets to help fund people’s retirements?”

Philp argued that the strength of the report lay in the PLSA’s desire to create a holistic mindset towards retirement and explore using people’s assets alongside their pension. However, he said challenges exist with leveraging the value of savers’ property.

“I would view the equity release market as not being mature at the moment. It’s costly. People have a really strong and understandable connection with their home,” he said.

Should tax relief be updated?

Tax relief on contributions may help to boost a saver’s retirement pot, and the PLSA is debating whether the current system should be altered in support of RITs.

Daniel Taylor, client director at administration specialists Trafalgar House, said the current tax system “doesn’t really reflect that most people are DC savers now and [tax relief] need[s] to be increased to save as much as they possibly can early on in their retirement journey”.

The existing setup benefits older workers with higher salaries, according to Taylor. He hypothesised the introduction of 40 per cent tax relief on the first £100,000 paid into a savings pot, followed by decreasing levels of tax relief.

The tax relief going into the pot would then attract compound investment return over the long run, he said.

Sarah Brown, principal at consultancy Punter Southall, argued that it would be difficult to make tax relief a stronger incentive for retirement saving, given the existence of other barriers to saving.

“I think tax relief is probably not the key for these people, whatever rate you set it at. Actually, whether or not they save is really driven by behavioural effects, by affordability, and by all the other things we talk about when we’re talking about encouraging people to save,” she said.