New research from Saga Investment Services has found that, despite the government’s pension freedoms giving us more control over our money in retirement, 40% of people over 40 have no idea of the cost of even a basic lifestyle in retirement, suggesting that more needs to be done to show people how much they need to save in order to be able to afford a decent retirement.
Saga found that four in 10 over-40s said they had no idea of the cost of even a basic lifestyle in retirement, with women much more likely to say this than men. When it comes to understanding the size of the total pension pot they would need to fund retirement, 80% of people admitted they no idea how big this would need to be.
Experts recommend that people should aim in retirement to have two thirds of the income they enjoy while working in order to have the same lifestyle. The table below shows the real income people would need to achieve a basic, comfortable and luxury lifestyle in retirement and the average estimates people over 40 gave for the annual cost of each of these lifestyles and the total pot they thought they would need to fund this.
| Over 40s Estimate annual cost | Actual Annual cost | Over 40s estimate of total pension pot needed | Actual income of this pension pot size | |
| Basic Lifestyle (bills, food & little left over) | £13,200 | £10,400 | £126,000 | £6,904 |
| Comfortable Lifestyle (inexpensive holidays, hobbies & social activities) | £20,500 | £18,600 | £244,000 | £13,300 |
| Luxury Lifestyle (Expensive holidays and hobbies such as golf and yacht club membership) | £56,600 | £64,000 | £500,000 | £27,000 |
Although some people are good at understanding the annual cost of these different lifestyles, when it came to translating that into the size of retirement pot they would need people really struggled, underestimating by around 50%. One in 10 thought you could afford a basic lifestyle on a pension pot of up to £25,000, which would pay £987 a year, but on average people thought you could afford this with a pot of £126,000, which in reality would get you just £6,904 a year. Saga says this demonstrates the retirement leap people need to make in order to make up the difference between ambition and reality. People in the North East are most likely to underestimate the cost of a basic retirement, thinking this could be achieved with a pot of just £74,000.
When it comes to affording a comfortable retirement, people on average thought this could be achieved with a pension pot of £244,000, which would actually only give an annual income of £13,300, some £7,000 short of target. Eight out of 10 people said they did not know how big a pension pot you would need to achieve a comfortable retirement.
Typically people thought it would take a pension pot of £500,000 to afford a luxury lifestyle in retirement, but this would just pay £27,000 a year, which would leave people two thirds below the real income needed to enjoy a lavish retirement.
Sally Merritt, head of product, Saga Investment Services, said: “The research proves just how desperately affordable advice and guidance is needed and we urge the regulator to address this. It is a real concern that people in their 40s and beyond are so unaware of what they need in their pension pot to give them the lifestyle they want in retirement. People are in danger of becoming pothole pensioners, who face a bumpy road ahead because they didn’t invest well enough when they had the opportunity.
“This could well be because people underestimate how long they are going to live in retirement, or that they simply don’t understand what sort of income a typical pension pot can generate. Our survey demonstrates how important it is for people to take the time to think about their savings and investments as early as possible to give them time to put a little more away if they think they are not going to have as much as they need.
“But the task need not be as daunting as people think, in just half an hour on a computer with the right paper work in front of them our free, personalised Look Ahead report can give people an accurate view of where they are with their retirement finance planning and make suggestions as to what else they might consider in order to achieve their goal.”
