Many higher earners living on £77k-plus incomes face 'nasty shock' at retirement
- How to sort out your pension if you fear it's falling short: Find out below
Retirement plan: What lifestyle do you want and can you afford it - find out below
Many top earners face a retirement shock as they are only saving enough for a middling lifestyle lacking luxuries or aspirational trips in old age, new research shows.
Nearly 70 per cent of households bringing in an annual income of around £77,000 or more are on track for at least a moderate retirement.
Just under 40 per cent are saving sufficient sums to hit a higher bar and fund a comfortable life.
A single person needs £25,000 a year and a couple £36,480 a year to achieve a moderate standard of living once they stop work, according to the study by Hargreaves Lansdown.
That rises to £38,662 a year and £58,480 respectively if you are aiming for a more affluent retirement, it calculates.
In the population overall, some 38 per cent of households are on course for a moderate retirement income and 18 per cent for a comfortable one.
'Well over two-thirds of the highest earning households are on track for a moderate retirement income,' says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
'On the face of it this looks good but dig a bit deeper and there's a nasty shock in store.'
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She says the reality is higher earners will be used to spending much more than they will be able to on the moderate level of income.
'It means there are some tough decisions in store for many unless they can start plugging the gaps in their Sipps [Self-Invested Personal Pensions] and workplace pensions.'
The Hargreaves figures for the income levels needed to achieve these lifestyles are based on the Pension and Lifetime Savings Association retirement living standards, but are lower than those typically cited.
That is because this year the PLSA included more aspirational items such as day trips after its research showed people have a greater desire to spend more time with family and friends after the pandemic.
The income required for a moderate lifestyle in particular shot up as a result.
Helen Morrissey: There are some tough decisions in store for many high earners unless they can start plugging the gaps in their Sipps and workplace pensions
Hargreaves therefore went back to the previous year's PLSA income figures and increased them by CPI inflation to come up with new figures it believea are more reflective of the increase in price of goods.
However, like the PLSA's benchmarks they assume you qualify for a full state pension, which rose to £11,500 a year in April.
And the figures do not include income tax, housing costs - if you rent or are still paying off a mortgage - or care fees.
The Hargreaves study was drawn from its Saving and Resilience Barometer, compiled in partnership with the forecasting firm Oxford Economics.
It is based on data from the Wealth and Asset survey by the Office for National Statistics - which takes its information from 10,000 households - plus other data from official sources.
How to boost your retirement savings
There are things you can do to help fill the gap between what you are saving and what you need for a comfortable retirement whether you are a high earner or not, says Helen Morrissey of Hargreaves.
Here are her tips, and scroll down to find our checklist on sorting out your pension.
1. Take the opportunity to increase your contributions every time you get a new job or pay rise will boost your pension over time.
Higher earners will benefit from tax relief on contributions of 40 per cent, or even 45 per cent.
2. If you receive a bonus then contributing a portion of that to your pension can also make a huge difference. Your employer may also add National Insurance savings.
3. It's worth checking whether your employer is willing to contribute more to your pension if you increase yours.
This is known as the employer match and if it is available and you have the spare cash it is a great way of adding significantly more to your pension without necessarily having to put in much more yourself.
4. Plan ahead – think about when and where you'd like to retire. Income targets can prove really useful in terms of helping you to think about what you want your retirement to look like and how much it is likely to cost.
5. Don't forget state pensions – request a free forecast.
6. Track down lost pots which can add thousands of pounds to your overall pension - read more on this below.
7. Consolidation has benefits, so you have an overarching view of what you have.
It's important to highlight that you need to make sure you aren't incurring expensive exit fees or losing out on useful benefits such as guaranteed annuity rates by doing so.
8. Use pension calculators to see how much income you are on track to receive and model the impact of putting more in if you are behind.
How to sort out your pension if you fear it's falling short
1) If you are worried about whether you will have saved enough, investigate your existing pensions. Broadly speaking, you need to ask schemes the following questions.
- The current fund value.
- The current transfer value - because there might be a penalty to move.
- Whether the pension is in a final salary or defined contribution scheme. Defined contribution pensions take contributions from both employer and employee and invest them to provide a pot of money at retirement.
Unless you work in the public sector, they have now mostly replaced more generous gold-plated defined benefit - career average or final salary - pensions, which provide a guaranteed income after retirement until you die.
Defined contribution pensions are stingier and savers bear the investment risk, rather than employers.
- If there are any guarantees - for instance, a guaranteed annuity rate - and if you would lose them if you moved the fund.
- The pension projection at retirement age. You can use a pension calculator to see if you will have enough - these are widely available online.
2) You should add the forecast figures to what you anticipate getting in state pension, which is currently £221.20 a week or around £11,500 a year if you qualify for the full new rate. Get a state pension forecast here.
3) If you are tempted to merge your old pensions, read our guide first to ensure you won't be penalised.
4) If you have lost track of old pots, the Government's free pension tracing service is here. Our retirement columnist, Steve Webb, has a guide to finding lost pensions here.
Take care if you do an online search for the Pension Tracing Service as many companies using similar names will pop up in the results.
These will also offer to look for your pension, but try to charge or flog you other services, and could be fraudulent.
