The Pensions and Lifetime Savings Association[i] states that a single person will need to be able to spend about £14k a year to achieve the minimum living standard, £31k a year for moderate, and £43k a year for comfortable. For couples, it is £22k, £43k and £59k. However, large numbers are falling short of these recommendations. The Resolution Foundation reports[ii] that around two-in-five working-age individuals or 13 million people are not saving enough to meet the minimum target for an adequate retirement income. Despite auto-enrolment increasing pension savings participation from 47 per cent in 2012, to 79 per cent in 2021, half the population fears their savings will run out.
Given these challenges, what more can employers and HR do to ensure retirement adequacy and those approaching retirement have the knowledge to make informed decisions to secure a comfortable retirement?
The retirement landscape
We are all living longer however, many are ill prepared for retirement. The number of 65-79 year olds are predicted to increase in England by nearly a third (30%) to over 10 million in the next 40 years, while the number of people aged 80 and over – the fastest growing segment of the population – is set to more than double to over 6 million[iii]. This means employees need to prepare to finance 20 years or more in retirement, in order not to run out of money in their 80s and 90s.
A major gap in the UK’s pension planning is the lack of affordable advice for those approaching retirement, particularly with smaller pension pots (less than £100,000). This situation risks creating a “lost generation”— those who were too young to benefit from defined benefit pensions and too old to have accumulated substantial defined contribution pension pots. Another issue is that many do not fully understand the implications of drawdown and other options, such as annuities, which can provide a guaranteed income.
Age UK[iv] has highlighted that around 90,000 retirees are making unsustainable withdrawals. Equally, research by The Lang Cat[v] indicates that only 9% of people currently pay for financial advice, down from 11% in 2023. Cost remains the primary barrier, with one in five avoiding advice due to perceived expense. There is an urgent need to simplify retirement planning and improve access to affordable advice, something the planned pensions review will hopefully tackle.
Employers can also play a crucial role in preparing their employees for retirement, with HR departments well-positioned to enhance education and guidance on pensions beyond just managing auto-enrolment.
Steps to improve retirement planning.
Firstly, they can take a proactive role in supporting retirement planning far earlier in people’s careers. It can seem like an uphill struggle to get engage employees with pension saving. Younger employees in their 20s and 30s are often not interested in something that seems so far away. However, a key message to convey is this is the very time to be saving as much as possible as it will have the longest time to grow. Compound interest is like that friend who always shows up early to the party—it is better when it has more time to mingle. Similarly, procrastination is the arch-nemesis of financial freedom. The earlier employees start, the less they need to save each month.
Budgeting basics
Many employees struggle with the basics of managing their money. Again, HR could start by helping them overcome this with the right strategies and education. Often employees are living pay cheque to pay cheque, despite earning decent salaries. This is not just a personal issue; it can affect work performance and overall well-being, but there are ways to offer guidance:
- Provide workshops: A series of workshops can help employees understand their income and expenses. An eye-opening exercise is to ask them to track every penny for a month. This can help reveal spending habits individuals are unaware of.
- Introduce the 50/30/20 rule: Suggest employees allocate 50% of their income to needs, 30% to wants, and 20% to savings and debt repayment. This simple formula provides a clear framework for employees to follow. Also, remind employees about the importance of building an emergency fund, aiming for at least three to six months’ worth of expenses.
- Partner with a financial institution to offer automatic savings plans: Employees could be encouraged then to set up automatic transfers to their savings accounts, ensuring they save before spending. This is a minor change that has the potential to make a significant impact.
- Provide resources to reduce debt: Employers can provide financial education and guidance on reducing debt, such as negotiating lower interest rates and consolidating loans. By tackling high-interest debt first, employees can free up more money for savings, pensions, and other investments.
Setting realistic retirement goals
Setting realistic retirement goals does not have to be overwhelming. There are now free tools and resources available that can help employees navigate this important journey with confidence and ease. This includes helping them through the following stages, taking one step at a time so they stay committed to their vision of retirement:
- Visualise the ideal retirement lifestyle: Encourage employees to picture their ideal retirement, whether it is travelling the world, pursuing hobbies, or spending more time with family. This vision can help employees set clear and meaningful goals.
- Assess current financial situation: Encourage employees to take a close look at their savings, investments, and any other sources of income. Understanding where they stand financially is crucial for setting achievable goals.
- Calculate retirement needs: Use online calculators or consult with a financial advisor to estimate how much money an employee may need to maintain their desired lifestyle. Consider factors like healthcare, inflation, and life expectancy.
- Set specific, measurable goals: Break down retirement goals into smaller, manageable milestones. For example, aim to save a certain amount each year or invest in a particular asset class. Having specific goals can make it easier to track and achieve.
- Create a flexible plan: Life is unpredictable, so its important employees have a plan that can adapt to changes. Encourage them to regularly review and adjust their retirement strategy to stay on track.
- Stay positive and patient: Remind employees that retirement planning is a marathon, not a sprint. Help them celebrate small victories along the way and stay focused on their long-term goals.
Overcoming the longevity risk
Planning for a longer retirement is not just about saving more; it is about ensuring financial stability for the years ahead. As people live longer, the concept of retirement has evolved. Gone are the days when retirement meant a few years of leisure. Today, many people can expect to spend 20, 30, or even more years in retirement. This longevity brings both opportunities and challenges, particularly when it comes to financial planning.
One of the most significant risks employees face is longevity risk – the risk of outliving their savings. Here are some strategies that can help employees financially plan for a longer retirement and ensure financial stability.
- Diversify investments: Spread investments across different asset classes to reduce risk. Consider a mix of stocks, bonds, and property to create a balanced portfolio.
- Consider annuities: Annuities can provide a steady income stream for life, helping to mitigate the risk of outliving savings. While they may not be suitable for everyone, they can be a valuable tool in retirement planning.
- Plan for healthcare costs: Healthcare expenses can be a significant burden in retirement. Consider long-term care insurance and other healthcare savings plans to cover potential medical costs.
- Regularly review their plan: Financial situations and goals may change over time. Regularly review and adjust the retirement plan to ensure it remains aligned with needs and circumstances.
Employers need to remind employees that planning for a longer retirement is not just about saving money; it is about creating a sustainable and secure financial future. By taking proactive steps today, they can enjoy peace of mind and a fulfilling retirement tomorrow.
Helping employees stay fully informed and engaged in retirement and pensions is vital. By proactively supporting their employees in retirement planning, HR can help ensure a more secure and financially stable future for their workforce.
A digital retirement planning solution, Pension Potential launched earlier this year for businesses and their employees. It takes the complexity out of retirement planning by providing personalised financial guidance and advice to individuals, empowering them to make informed decisions about their pension and retirement options. For more information visit: www.pensionpotential.co.uk.
[i] https://www.retirementlivingstandards.org.uk/
[ii] https://www.resolutionfoundation.org/press-releases/families-need-help-in-rising-to-the-triple-savings-challenge-of-saving-more-for-rainy-days-bigger-life-events-and-retirement/
[iii] https://ageing-better.org.uk/our-ageing-population-state-ageing-2023-4
[iv] https://www.unbiased.co.uk/news/financial-adviser/drawdown-pensioners-unaware-of-risks-study-suggests
