Scary truth about our substandard pensions

Two new reports have revealed just how expensive life in retirement is - and how ill prepared we are for such costs.

How much money do you need in order to enjoy a comfortable retirement? And how are you going to get that money together?

Two reports published this month demonstrate just how mistaken many of us are when attempting to answer either of those questions.

Over 55s are worst off

It will come as no surprise to hear that money can be a little tight in later years. However, some research by charity Age UK has revealed just how expensive later life can be.

The charity has published a study on the impacts of inflation on those in later life, and has found that elderly Brits are hit far harder by inflation than has been acknowledged up to now. As a result, Age UK has developed its own Silver RPI.

The Silver RPI uses information from the Living Costs and Food Survey, which is used to determine the 78 items which make up the normal RPI, but those items are then reweighted to better reflect the spending patterns of those aged 55 and above (for example, the amount older people spend on insurance premiums is higher than the rest of us).

And its findings of the difference between official RPI and actual inflation on older Brits over the past two years are pretty scary. Below is a table Age UK has put together, highlighting the impact of this difference on the various age bands.

As you can see, the cost of living is more expensive for these older Brits than the rest of us, and by pretty significant sums.

Why the difference?

So why such a big variance? According to the report, while younger members of the UK have benefitted from the fall in mortgage interest rates, the fall has had a much smaller impact on those in later life who are unlikely to carry much mortgage debt. In addition, the areas where they tend to spend proportionally more, such as utilities, have seen prices rise, on the whole.

And getting the calculation of inflation so wrong for older people is a problem. It presents a false picture to those in or approaching retirement about just how much life is likely to cost them, and how much money they need to have set aside to ensure as comfortable a retirement as possible.

What’s clear is that life once you hit retirement age is far more expensive than most of us expect, and there is a real risk that we will fail to put aside enough money to cover those years.

Be sure to follow some of the tips in Boost your pension by £130,000 before you retire in order to maximise your pension pot before it’s too late.

The other end of the scale

A second report published this month highlighted that at the other end of the spectrum, younger workers are fully aware that ensuring they have enough money to support their lives in retirement is entirely their own responsibility.

In its bi-annual Retirement Scope research report, AXA highlighted that more than a third of Brits aged between 25 and 34 expect most of their pension provision to come from their own individual investments and savings, with just one fifth expecting the State Pension to suffice. This is a clear contrast to the Baby Boomer generation, of whom around half expect the State to provide the bulk of their retirement income.

What’s more, the younger generation actually favour providing for their own twilight years over working longer. Almost half said they would prefer to simply put more money aside in savings and pension payments compare to just 4% who are happy for a rise in the state retirement age.

Actions speak louder than words

Sadly, knowing that we hold our own retirement destiny in our own hands is not enough for people of my generation, as we are completely failing to adequately prepare for retirement. According to the study just six in ten younger Brits regularly save money. Indeed, just shy of a third (31%) save less than £1,200 a year.

Engagement with our pension is pretty pathetic too. Just 12% know what their retirement income will be, down from 18% in 2008 in the last survey. Just two in every ten have a personal pension set up, while less than four in ten have an employer pension plan.

I have to admit, this report has certainly rung true with me. I have a pension set up, but am nowhere near as rigorous as I should be in ensuring I pay into it each month, and in terms of monitoring its performance. There are all sorts of reasons for the apathy that many younger people feel towards their pension provision, from thinking that’s something to worry about once you get old to a general distrust of the pension world.

After all, the vast majority of the time that you see pensions discussed in the mainstream press, the coverage tends to be pretty negative.

The times they are a changin’

Thankfully, changes to the pension system will remove the possibility of Brits completely ignoring their pension, thanks to the National Employment Savings Trust (NEST).

The scheme will force all employers, large or small, to begin offering a formal defined-contribution pension scheme to employees. Both employer and employee will be required to contribute a minimum amount towards the pension each month.

The initiative comes into force in 2012 for most of us, though there will be a phased introduction depending on the size of the employer firm. For a great round-up of how the scheme will work, be sure to have a read of The future of your pension.

Let’s hope it does give those of us with time on our side a hearty kick up the backside.

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