The industry has welcomed the Pensions and Lifetime Savings Association’s retirement income standards, but experts warn current minimum contribution levels are not enough to get savers over the line from a moderate to a comfortable lifestyle standard.
A 25-year-old earning £28,000 a year and making pension contributions of 8 per cent could expect an annual income of £15,000 at retirement including the state pension, significantly more than PLSA’s minimum income standard.
However, if the same individual was looking to get closer to the PLSA’s moderate target of £20,200, they would need to up their contributions to at least 12 per cent to earn them £18,000 a year, according to Michael Ambery, head of defined contribution provider relations at Hymans Robertson.
The PLSA retirement expenditure standards unveiled today revealed a single person will need £10,200 a year in retirement in expenditure income to achieve a minimum living standard, £20,200 for a moderate living standard, and £33,000 a year for a comfortable lifestyle.
The targets announced by the PLSA are a fantastic step forward and will go a long way towards addressing the current savings crisis
Michael Ambery, Hymans Robertson
Comfortable retirement could be aspirational
The standards can be summarised as 10k-20k-30k for individuals and 15k-30k-45k for couples, and the PLSA has called on the industry and schemes representing 90 per cent of active savers to adopt the new standards by 2025.
Mr Ambery said: “By pairing target lifestyles to an annual income, savers can start to seriously consider what they’ll need to live off when they retire, and how best to achieve that.
“There’s no doubt that the introduction of pensions auto-enrolment contributions have been incredibly successful at getting people to start saving.”
He added: “But it’s also clear that, as a nation, we are still far from being able to say ‘job done’.
“The targets announced by the PLSA are a fantastic step forward and will go a long way towards addressing the current savings crisis.”
A comfortable retirement is likely to be aspirational for all but the fortunate few paying large contributions over a long period, according to Mr Ambery.
He said: “The minimum is exactly that and we would expect all schemes to set that as a floor under which they would not want members to fall.
“Then with clear guidance and support, we can help people get towards or even above the moderate amount.”
Pensioner poverty risk minimised
Nigel Peaple, director of policy and research at PLSA, said it was reassuring that most members receiving a full state pension of around £8,7000, plus AE pensions, should be able to achieve the minimum standard.
He suggested that topping up minimum contribution rates to 12 per cent would then generally leave members halfway between the minimum and moderate standards, and that an important follow-up question to ask a member would be: ‘What is preventing you from moving up in the standards?’
Matthew Binnington, business development manager at PTL, said the targets will help members to genuinely envision their future self and what their retirement will look like in terms of practical commodities and choice.
He said: “These standards have the potential to become part of the national dialogue in the same way as ‘five a day’ has and, in doing so, dramatically shift public engagement with pension saving by helping individuals to better envision their future.
“In turn, this should result in more informed contribution engagement, better and more proactive investment decisions to suit individual needs, and better retirement incomes.”
Adopting the standards
Some 22 organisations within the industry have already adopted the standards and will seek to include them in online pension calculators and benchmarks to help members calculate what they need to achieve their desired outcomes.
While the standards do not include care costs, rent and mortgage expenditures, members will be able to add to and personalise the targets through pension providers’ websites once adopted.
10k-20k-30k: PLSA launches new retirement living standards
The Pensions and Lifetime Savings Association has launched its retirement living standards, an attempt to translate savings targets into a description of the quality of life they will actually enjoy in later life. Read more
Members will also be able to adjust for a range of inputs, including salary, retirement ages, history of saving and lifestyle elements, to help predict and explain how saving more can help change their retirement outcomes.
The Money and Pensions Service will adopt the standards in its own calculator, and the objective is for them to be included within the long-awaited pensions dashboard.
