Millions of pension savers have unrealistic expectations of how much they will have to spend in retirement, according to pension experts.
Most believe their incomes will range somewhere between 50% and 100% of their pre-retirement earnings.
But they are in for a shock because workers are not saving enough for their pensions to return the money they need for this level of income, says Nest, the government scheme for auto-enrolled pensions.
How much money is enough for retirement?
A new pension insight team set up by Nest found:
- 60% of workers expect to retire with an income of 50% to 100% of current earnings when the actual income replacement rate is 29% of current earnings
- Workers earning the lowest incomes between £10,000 and £15,000 believe they are already coping on the least amount of money they can get by on and expect to earn at least the same from a pension in retirement
- 66% of retirement savers doubt their pensions will give them the income they need in retirement
- Close to a fifth of pension savers have no idea about how much money they will need to fund their retirement
“No one can really say how much pension should pay to give an income that is enough for retirement,” said Nest CEO Helen Dean.
“We do this with the replacement rate, which is pension income as a percentage of a worker’s final salary, but it’s not the best indicator of individual needs.
Setting pension savings goals
“Savers need to look at housing costs, debts and other bills to calculate their own figure. Other factors such as whether a partner has a pension or will continue working and aspirations for retirement also need to be considered.”
“It’s worrying too many people seem to have unrealistic expectations for their retirement income as many are simply not saving enough to match their hopes.”
Dean argues that the focus for retirement savers has to move on from helping them to save to thinking about how much they need in retirement and how the money will be spent.
That means setting a budget for retirement and adjusting saving goals to provide a pension fund that is large enough to match spending – or to adjust the budget down to match how much is available to save.
