Is the statutory minimum 5%+3% enough?

Cobbler_tone

SarahB16 said:

A problem is whether you need to rent privately in retirement. 

Perhaps a person never got on to the property ladder perhaps he or she is divorced and then cannot afford to buy on their own. 

Many assumptions suggest that you have paid off your mortgage in retirement but for an increasing number of people they are having to continue to rent privately when in retirement which will obviously take up a significant amount of a person's pension.  

But even that is as simple as another £12-20k a year on top (or add in your relevant rental plus factor increases)
The plus side being you don’t have to factor in M&R.
I’d say if you get divorced in retirement you may as well rip it up and re-cut your plans.

NoMore

westv said:

NoMore said:

The problem with the plsa is they interview people on what the think they require in retirement. I would be not be surprised if they do it not by figures but by asking how often do they think they would need a new car/kitchen/holidays etc and the people replying aren’t actually totalling the cost. It’s aspirational rather than based on actuality. 

There are full breakdowns available on what exactly the money is spent on - not sure if the spreadsheets are up to date or not though.

The problem is I’m not sure the interviewees are seeing the breakdowns or just being asked how often will you want to holiday and then the researchers decide on what that would cost. 

SnowMan

michaels said:

In this scenario someone who starts on 25k and sees 2% real income rises and makes the 8% pension contribution will retire on 74% of their final real salary (DC plus state pension)

Start on 40k and the proportion is 56%.

On your assumptions I agree your numbers.

Factor in that the 8% minimum contribution only applies to qualifying earnings as mentioned by others (and assuming the lower limit goes up with earnings also) and the 74% reduces to 67% (made up of 48% from state pension and 19% from the DC pension).

And the 56% at 40K earnings reduces to 52% (= 30% from state pension + 22% from DC pension)

If the DC returns are only 2% above inflation then it's 60% not 67% (= 48% SP + 12% DC)

So the majority of the pension in retirement is coming from state pension especially if real returns are only 2%.

The earnings going up at 2% above prices assumption isn't that important because it mostly numerically cancels, so if earnings go up with inflation, and so does everything else, and if investment returns are correspondingly lower at 2% above inflation (rather than 4%) then the above percentages don't really change.

Talking historically about where the auto-enrolment contributions came from, in the second Pensions Commission report (chaired by Lord Adair Turner) from 2005 which led to auto-enrolment they came up with this conclusion (page 7).

Although it was a good report I did think at the time it was a mistake for auto-enrolment minimum contributions not to be based on full salary as it penalised those on the lowest pay.

Anyone paying in only the minimum contributions into their pension over a full career who doesn't have any other resources in retirement other than a full state pension is probably going to find it difficult to retire before State Pension Age without a significant fall in their standard of living.  

hugheskevi

In analysis such as this, it is important to remember that this is one of the better-case scenarios, ie, someone in constant full-time employment always saving into a pension.

Many of those in danger of lower standards of living will be affected by things like:

1. Not working (eg bringing up family)
2. Part-time work
3. Periods spent overseas with no pension, which may also affect State Pension entitlement
4. Periods of unemployment
5. Periods of poorly paid self-employment with no pension
6. Periods out of workforce caring (either for children or elderly)
7. Periods out of labour market due to sickness/disability
8. Involuntary premature end to working life, probably through disability
9. Late start to working life due to education/training
   
10. Debt either reducing pension saving in working life, or using pension for repayment
11. Being a single parent (more difficult to work and save, as well as higher costs)
12. Growth of jobs in gig economy with no pension
13. Reduction in home ownership
14. Growth of mortgages being paid into later life
15. Feeling obligated to support older children in life, eg, house deposits.
16. The growing tax burden, as higher rate tax affects an increasing number of individuals who are not well off (eg single income family living in London).

Also, the current system has only been in place for about 10 years. so the past needs to be considered:

1. No private saving prior to automatic enrolment
2. Much of working life spent in the period following the decline of private sector DB pensions
3. Gender pay gap
4. Women much more likely to have worked part time or have spells out of labour market
5. Low paid self-employed likely to have very little private pension saving

Perhaps the most concerning of all of these is the risk of an involuntary premature end to working life, probably through disability. Working longer can fix pretty much any financial problems in retirement, but a lot of people find this option isn't available and are not insured against it.

ali_bear

Agree with both of the above comments. But don't forget that there is a national minimum wage, and those earning below the level at which NI is payable won't be building up any state pension entitlement either. And some of the non-earners will be eligible for state benefits (not saying that is a desirable situation). They also had to consider the cost for employers. 

QrizB

ali_bear said:

... those earning below the level at which NI is payable won't be building up any state pension entitlement either.

That's not true. Those earning between £125 and £242 a week pay no NI but still earn pension credits.

Sarahspangles

hugheskevi said:

In analysis such as this, it is important to remember that this is one of the better-case scenarios, ie, someone in constant full-time employment always saving into a pension.

Also, the current system has only been in place for about 10 years. so the past needs to be considered:

1. No private saving prior to automatic enrolment
2. Much of working life spent in the period following the decline of private sector DB pensions
3. Gender pay gap
4. Women much more likely to have worked part time or have spells out of labour market
5. Low paid self-employed likely to have very little private pension saving

Lack of confidence in pensions as a concept could be a factor too. There was a phase when lots of my peers were investing in buy-to-let as a pension strategy - or ending up with this as their de facto strategy after becoming ‘accidental landlords’. And a few over-extended themselves on mortgages for their own homes on the basis they’d be able to downsize, not factoring in that they’d still have teens/students in their late 50s/early 60s. 

SarahB16

Cobbler_tone said:

SarahB16 said:

A problem is whether you need to rent privately in retirement. 

Perhaps a person never got on to the property ladder perhaps he or she is divorced and then cannot afford to buy on their own. 

Many assumptions suggest that you have paid off your mortgage in retirement but for an increasing number of people they are having to continue to rent privately when in retirement which will obviously take up a significant amount of a person's pension.  

But even that is as simple as another £12-20k a year on top (or add in your relevant rental plus factor increases)
The plus side being you don’t have to factor in M&R.
I’d say if you get divorced in retirement you may as well rip it up and re-cut your plans.

I didn't say, 'if you get divorced in retirement' but yes, as you say, if you did then that really would change your retirement plans and forecasts.  

Albermarle

I find the PLSA figures equally confusing in that "comfortable" is a relative term in the same way that "poverty" is a relative term.

'Which' also produce similar retirement income figures, although they tend to be lower than the PLSA and they name their higher income scenario as Luxury.
This is also a relative term, or at least means different things to different people. For many Luxury would conjure up images of people with multiple homes and holidays across the globe, a big yacht, Rolls Royce etc ; not a couple on £50K pa.

michaels

Albermarle said:

I find the PLSA figures equally confusing in that "comfortable" is a relative term in the same way that "poverty" is a relative term.

'Which' also produce similar retirement income figures, although they tend to be lower than the PLSA and they name their higher income scenario as Luxury.
This is also a relative term, or at least means different things to different people. For many Luxury would conjure up images of people with multiple homes and holidays across the globe, a big yacht, Rolls Royce etc ; not a couple on £50K pa.

I think a fair comparison would be against median income of those just before retirement, possibly with an adjustment to reflect the supposed reduction in housing and commuting/work costs.  Then again using terms like '80% of median' is a lot less emotive and thus won't gain the same media traction.