Lovewell’s logic: Will the living pension overcome undersaving?

Herbert Smith Freehills, Citizens UK, Aviva, and Phoenix Group this week became among the first employers to sign up to the new Living Pension Employer standard, launched by the Living Wage Foundation. They were joined by The Good Things Foundation and Wealthify.

The living pension is a voluntary savings target of 12% of an employee’s salary, whereby the employer contributes 7%. It is intended to help employees build a sufficient pension pot to provide enough income to meet basic everyday needs when they reach retirement.

While the issue of a retirement savings shortfall in the UK is not new, it is certainly significant. Research published by the Living Wage Foundation this week found that more than half (56%) of respondents feel that they will never be able to afford to retire, while just over a third (37%) are not confident that they are saving enough to meet basic needs in retirement. A further 64%, meanwhile, believe they will need to work for several years beyond retirement age.

The problem is further highlighted in the Department of Work and Pensions’ (DWP) Analysis of future pensions incomes, published earlier this month. This found that 38% of the working age population – equivalent to 12.5 million people – are undersaving for retirement when measured against the DWP’s target replacement rate, a percentage of pre-retirement earnings an individual would need to replace to obtain an adequate income in retirement.

This is before the deduction of housing costs, and is calculated on the basis of converting the full value of an individual’s defined contribution (DC) pension into an annuity. When calculated on the premise of converting 75% of a DC pension pot into an annuity, however, the percentage of the working age population considered to be undersaving rises to 43%.

While a number of employers already go above and beyond the living pensions minimum contribution level, the scale of the issue of undersaving reflects the fact that many do not.

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Introducing a voluntary minimum standard is a positive step forward, which gives a good indication of the level both employees and employers should be aiming for to ensure an adequate retirement outcome.

Debbie Lovewell-Tuck
Tweet: @DebbieLovewell