British men have not saved enough to pay for 10.3 years of their retirement. Women are going to live 12.7 years with no retirement income. Those were the headlines, following publication of a report by World Economic Forum.
The report shows how long the people in six major economies (USA, Netherlands, UK, Australia, Canada and Japan) will outlive their pension savings. The UK is not the worse, that honour falls to Japan. (16.1 years men; 19.9 years women); The best performing of the six countries is USA (8.3 years men, 10.9 years women).
The Daily Express reacted to the above with the headline that Briton’s will have to work 10 years longer. However, before we all get too morose and express gloom and despondency look a little deeper at the assumptions behind the World Economic Forum:
- Contributions – Working life is from age 25 with retirement at age 65. Contributions begin at 3% of salary and increase by 1% each year to 9%. Starting salary is $30k -just under £24,000.
- Retirement income from age 65 is 70% of expected final pay.
- Life expectancy for a 65-year-old man in the UK is 18.8 years and for a woman is 21.3 years. For other countries the assumptions reflect the longevity of the country.
The headline is therefore misleading. In reality the results of the report are based upon notional contribution rates; local investment returns; with a 70% income from age 65 until local life expectancy. This is more a comparison of investment strategies and returns. It does not reflect reality, particularly in the UK.
For many who are dependent upon auto-enrolment, the assumed contribution rate will be higher than what will actually be paid. The contribution rate will be 8% and not 9%. Also, it is based on total earnings when earnings below the lower earnings limit, currently £6,136 per annum, are excluded.
On that basis it is unlikely that 70% income will be delivered for as many years as the results of the report suggest. On the face of it the outcome will be worse for the UK. It is not.
The 70% income does not include the State pension that the indiviudal will receive. For someone on the earnings used this could deliver 30% of their final earnings. 70% of final earnings is the often-recommended retirement replacement income for someone with earnings of £24k a year. While their State pension will mitigate the shortfall in contributions and the number of years with ‘no pension’, it won’t make up all the missing 10 years.
The report does identify that when it comes to pension savings many in the UK will experience a shortfall. Although the recommended replacement income falls for those on higher incomes, the state pension will represent a smaller proportion of final earnings, and earnings above the Upper Earnings Limit (£50k a year) may not count towards pension contributions.
While the report is based upon a 25-year-old saving over 40 years for retirement, many have no pre auto-enrolment savings, or if they do there could be long periods when no pension contributions were made. Until auto-enrolment becomes embedded into our savings culture, large numbers will have a shortfall far in excess than the 10 years the report implies.
The report concentrates purely on pension savings. It does not consider housing wealth being used to supplement savings. Fortunately, 70% of those who are retired own their own homes. They can rent out a room; move to another home releasing some money in the process; or use an equity release plan.
When you dig deeper into the World Economic Forum Report and consider its implications many will have to work a lot longer than the additional 10 years The Daily Express reported. That is unless they use their housing wealth to supplement their pensions savings.
In recent years we have seen the equity release market grow rapidly. All the indications from this report are that this growth will continue for many years to come.
Bob Champion is chairman of the Air Later Life Academy