Retirement shortfall looms due to pandemic effects

Laura Miller

by , Freelance financial journalist

at PensionBee

03 Feb 2021 /  

A long road heading into the sunset

Savers preparing to retire may feel they have to delay their plans, while younger cash-strapped workers are coming under pressure to save more, due to the influence of the coronavirus pandemic.

Analysis from Moneyfacts has revealed savers are likely to be disappointed by their pension fund’s growth in 2020. At the same time, annual annuity income is continuing to fall.

The average pension fund grew by 4.9% in 2020, despite a tumultuous year for financial markets as businesses were forced to shutter. But this was down significantly from the 14.4% growth seen in 2019.

As pension funds returned less, HMRC data shows savers drew £2.3bn out of their pots under pension freedoms during Q3 2020, a rise from Q2 that may well be attributed to the pandemic putting savers’ finances under pressure.

For pensioners who wanted to use their nest egg for a guaranteed income, Moneyfacts found on average the amount someone aged 65 could get by buying a standard annuity was down 6.3% in 2020. This follows an 8.5% fall in 2019.

With low interest rates set to be a feature of the economy for longer and with national lockdown delaying any recovery in corporate profits, retirees are being urged to lower their income withdrawal rate to avoid running out of money - to no more than 4% a year.

Those still building their pension funds may need to review how much of today’s income is set aside for their future retirement. Unless the economy rebounds quickly and inflation takes off, it’s likely a bigger fund will be needed.

The worrying state of UK savers’ retirement plans has been highlighted by social think tank the Resolution Foundation, which found half of workers have less than £2,300 in their pensions.

Among the lowest paid savers, those aged 25-34 had just £319 in a pension, those from 35-44 had £1,562, and those nearest to retirement, aged 45-54, had just £2,391. This is just a tiny fraction of what’s required.

The Resolution Foundation calculated a single homeowner in retirement needs a weekly income of at least £209, and £445 for a couple in private rented accommodation. This would require a final pension pot of around £70,000.

The report argued the current 8% Auto-Enrolment minimum pension contribution falls very short. It wants employers to contribute more to staff pensions, similar to the campaign for a national Living Wage, which promotes paying wages above the national minimum wage.

A worker aged 25 today needs to be contributing a total (employer and employee contributions, plus tax relief) of 11.2% to their pension, according to the Resolution Foundation. Someone aged 35 today would need to be putting in 15.1%.

With the youngest and oldest workers among the hardest hit by coronavirus-related job losses and redundancies, many will struggle to improve their pension contributions without employers shouldering more of the burden.

For many there will be no easy financial choices over the coming months. But staying in a company pension (benefiting from ‘free money’ towards your retirement from your employer), is really worthwhile in the long run.

No workplace scheme? If you’re self-employed it’s even more important to save into a pension as you won’t benefit from employer pension contributions as part of Auto-Enrolment. With PensionBee’s flexible self-employed pension, for example, you can save as much or as little as want, whenever your business allows.

Retirement can seem like a long way off (for many it is), but last year’s big fall in pension growth shows how vital building a pot up over decades really is. It leaves you more able to weather ups and downs in the financial markets – without them completely derailing your future plans.

Laura Miller is a freelance financial journalist.

Risk warning: As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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