Will we ever summit the pension mountain?

29 May 2018
We seek to answer your clients’ most frequently asked question: how much do I need to save for my retirement?

Our recent research has found that the amount of retirement savings needed for a comfortable retirement has grown in size in real terms by three quarters since 2002, from around £150,000 to £260,000. This so-called ‘pension mountain’ increases for those who don’t own their home and need retirement savings to pay rent in retirement. Our research shows these savers could need retirement savings as high as £445,000 to avoid a slump in living standards.

Our new policy paper seeks to answer clients’ most frequently asked question in pensions – how much do I need to save for my retirement?  It looks at an average earner on just under £27,000 per year, and assumes that they draw a full state pension of just over £8,500 each year. It assumes that retirement will bring some cost savings such as no longer having to pay a mortgage, contribute into a pension or pay work-related costs, and therefore suggests that workers who retire on two thirds of their pre-retirement wage won’t experience a fall in their standard of living. This means a private pension income of just over £9,000 is needed in addition to the state pension.

How the ‘pension mountain’ has grown

Back in 2002/03, when interest rates were higher and life expectancy was lower, retirement savings of around £150,000 would have delivered a private pension at this level through retirement.  But as the chart below shows, the pension mountain has grown since then to stand at roughly £260,000 today.

How the ‘pension mountain’ has grown

As well as looking back, the paper also looks forward to an era when fewer people will have become homeowners during their working life and more will have to fund rent out of their retirement income. For the minority of pensioners renting from a local authority or housing association, this means an extra £125,000 will be needed in retirement savings to generate an income sufficient to cover ongoing rent in retirement.  But for the growing number of pensioners renting from a private landlord, higher private rent levels mean a total pot of £445,000 will be required. That’s £185,000 more than those who have no rent or mortgage costs in retirement.

Our view 

This research is a reminder that when your clients save for retirement, they are chasing a moving target.  If their retirement savings are going to support them through a longer retirement and in an era of lower interest rates, they’ll need to build a much bigger pot than in the past. 

More worrying still, we can no longer assume that they’ll be mortgage-free homeowners in retirement. For those unable to get on the property ladder during their working life, a large private rental bill needs to be factored in to retirement planning.  For all of these reasons, we cannot afford to be complacent about current levels of retirement saving, and the value of advice is stronger than ever to help your clients towards a better retirement.

This research also has big implications for the mandatory 8% contribution rate from April 2019 for those who have been enrolled into a workplace pension.  This is a great start, but the government needs to act quickly to nudge people up to more realistic savings levels. Without this, many millions of people will face a sharp drop in living standards when they retire. 


Source: Royal London, Will we ever summit the pension mountain: policy paper, May 2018

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.