Could you face a pension shortfall?

One in three middle-aged Brits is set to retire on the State Pension alone and many more face a shortfall in their pension. It could leave a significant gap between expectations and reality. If you’re not sure what income your pension could deliver in retirement, checking sooner rather than later gives you an opportunity to plug the gap.

Based on the spending habits of those that are already retired, Nationwide estimates that those retiring in the future will be almost £400 short each month. Over the course of a 15-year retirement, it leaves a shortfall of £68,000. When you factor in that those considered middle-aged today are likely to be in retirement for longer than 15 years and many will want to enjoy a comfortable lifestyle with some luxuries, such as holidays, the gap is even more significant.

The research also found:

• Less than one in ten workers that are middle-aged have clear retirement goals
• 52% are worried about affording retirement and 43% believe they won’t be able to afford the lifestyle they want
• Just four in ten have a private pension in place
• Over half of those saving into a pension don’t know the value of it

How much you need to save for retirement is dependent on the lifestyle you want to enjoy once you’ve given up work. However, if there is a potential shortfall, the sooner you discover it the greater the opportunity you’ll have to take action, whether you’re planning a retirement that’s focussed on taking it easy or one filled with new experiences.

What is your target income in retirement?

The first step to take is to calculate the level of income you need for retirement.

Many retirees find that their overall expenditure decreases once they give up work, as travel and other associated costs will be reduced. However, you may be planning to invest more in hobbies, family and travelling, for instance. When working out a target income, be sure to include both the essential bills and those luxuries you’re looking forward to, as well as any large one-off costs that will come out of your pension too.

To give you a general idea, Which? research indicates that the average retired household spends around £2,200 a month; £26,000 a year. This covers all the basic areas of expenditure, as well as a few small luxuries, such as European holidays and eating out. Those that enjoyed long-haul trips, new cars and other further luxuries were found to spend around £39,000 annually.

Remember, this is simply an average, your desired retirement income may be different. As a result, it’s important to think about how you’re likely to spend.

The next thing to do is to see how this matches up with your current retirement provisions.

If you’re a member of a Defined Benefit (DB) scheme, you can contact the scheme directly to understand the current level of retirement benefits you’ve built up. This income is guaranteed and often linked to inflation. The accrual rate will be defined too, allowing you to calculate how this income may change between now and the retirement date.

If you hold a Defined Contribution (DC) scheme, again, you can contact the provider to receive the current value of your pension. However, it can be difficult to work out what this means for your retirement income, as contributions may change, and the savings are typically invested. This is an area we can help with.

You may have more than one pension, and possibly a mix of both DB and DC schemes; make sure you check them all.

What should you do if you find a shortfall?

After you’ve done the above, you may find there’s a gap between your expected income and how much you need for the lifestyle you want. Don’t panic, uncovering a shortfall now is far better than not finding out until you reach retirement, when your options may be limited.

So, what options do you have? Among them may be:

• If you haven’t already, check your State Pension projection. With the State Pension paying £8,750 each year, assuming you have 35 years on your National Insurance record, it serves as a useful foundation to build the rest of your retirement income on.
• Increasing your contributions is one of the simplest ways to increase your pension pot if you have the earnings to do so. This may also mean you benefit from further tax relief and employer contributions to boost your savings further.
• Assess how you could use other assets. Few retirees rely solely on their pension to create an income. Take a look at how savings, investment, property and other assets could be used to make up the shortfall.
• Decide where you’d make compromises. If increasing your retirement savings isn’t an option, making compromises is an option. Would you be willing to work for a few extra years to achieve the lifestyle? Could you reduce retirement spending in any way?

If you’re worried about your retirement income, please get in touch. We’re here to help you make sense of where your retirement savings are now and how to get on track with your goals in mind.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulations which are subject to change in the future.