Pensions report

One in three Brits facing hardship in retirement

Scottish Widows head office
Scottish Widows: comprehensive survey (pic: Terry Murden)

One in three (35%) individuals could be facing poverty in retirement according to new research which shows that immediate cost of living expenses are pushing pension preparations down the list of priorities.

The report’s new National Retirement Forecast (NRF) establishes the clearest picture ever captured of the UK’s future retirement landscape.

Scottish Widows says many groups – such as renters and young people – are disproportionately facing hardship, while others such as millennials are saving well for retirement:

  • Almost half (43%) of the people predicted to struggle in retirement expect to be still paying rent.
  • Rental costs amount to 60-70% of renters’ retirement income in several parts of the country, but this figure to  130% in London.
  • Almost half (41%) of people currently in their 20s are heading for hardship in retirement, with an average retirement income of £10K among this group.
  • 43% of Millennials are on track for a comfortable lifestyle, reflecting strong savings behaviours and the benefits of automatic enrolment.
  • On average, women will receive a third less income in retirement than men (£19K vs £12K).
  • Half (49%) of Brits have not checked whether they are entitled to the full state pension.

In addition, the NRF highlights how employment patterns can create challenges for different demographics. Women, ethnic minorities and disabled people are disproportionately represented in lower paid and part-time jobs in which it is more difficult to accrue a sufficient pension pot.

Self-employed people generally lack formal incentives to save adequately compared to full-time employees. The average full-time employee is on track to receive £27,000 a year in pension income – nearly three times what the average part-time employee and the average self-employed person is on track to receive (£11,000 and £10,000 respectively).

Living expenses remain a real concern for a large majority (75%) of Brits, which could be affecting retirement preparation. Against the backdrop of ongoing economic uncertainty, a worrying minority (21%) is also cutting back on essentials – up from 16.5% in 2022.

Pete Glancy, head of policy at Scottish Widows, said: “Our new National Retirement Forecast paints a stark picture – one in three (35%) of us are facing the harsh reality of a retirement where we will struggle to make ends meet.

Last year’s Retirement Report highlighted the impacts of the pandemic, cost of living and wage stagnation. This year the pressure seems to have intensified due to increasing inflation and interest rates continuing to climb.

“The solution needs to be threefold. We are calling on the Government to help end retirement poverty by implementing long-term reforms, such as ensuring that automatic enrolment can support those on lower incomes.

“Secondly, businesses need to do more to address the inequalities faced in the workplace by disadvantaged groups like women, disabled people and the LGBTQ+ community. Finally, the financial services industry must get better at effectively communicating with diverse groups to build trust and ensure that people of all incomes and demographics understand how to save effectively for retirement.”

The disability pension gap

While the NRF reveals a challenging retirement landscape nationwide, it also indicates the particularly concerning outlook for disabled people, more than half (51%) of whom are set to face poverty in retirement.

The average disabled person will need to manage on £11,000 per year in retirement – just 61% of the income predicted for non-disabled people.

According to disability equality charity Scope, disabled households need £975 more per month to secure the same standard of living as non-disabled households, meaning that the already considerable retirement income gap highlighted by the NRF may even be a conservative estimate.

Louise Rubin, head of policy and campaigns at Scope, said: “Life costs a lot more when you’re disabled, and planning for retirement is a luxury many cannot afford. Many disabled people are denied the opportunity to get into, stay in, and progress in work, making it much harder to build up a pension.

“We need to break the link between poverty and disability and make sure disabled people have an equal standard of living. Tackling the disability employment gap and driving down the extra cost of disability must be made political priorities.

Annuities on the rise

Pension savers could be seeing ‘boring old’ annuities back on their radar, as annuity rates rise again after the recent UK inflation shock. 

Annuities are a product sold by insurers that guarantee an annual income in return for a lump sum payment, and annuity rates – the amount of income per year you get for a certain lump sum – are linked to bond yields and interest rate expectations. 

The unexpectedly sticky inflation readings for April – 8.7% headline and 6.8% core – set the cat amongst the bond market pigeons, with investors suddenly betting that the Bank of England would keep rates higher for longer. Two-year bond yields rose above 4.5% for the first time since the tumultuous aftermath of the Truss and Kwarteng mini-Budget in September 2022. 

Gary Smith, partner in financial planning at wealth manager Evelyn Partners, says”  “While annuity rates are not experiencing the sudden surge they did last autumn, they are starting from higher levels maintained since then.

“This could present an attractive buy-in point in the coming weeks and months for those who are seeking to secure income from their pension pot in the form of an annuity. If inflation ceases to surprise and does pull back as expected, these annuity rates could be shortlived.” 

As annuity rates are determined by gilt yields, they have improved markedly as the Bank of England hiked the bank rate from 0.10% in December 2021 to 4.5% currently.

That means that over the last year or so a saver has been able use a lump sum from their pension pot to lock into higher annual incomes than have been available since rates hit rock bottom after the financial crisis. After pulling back a bit from last autumn’s peaks, annuity rates are now on the up again as inflation worries have pushed up forecasts for bank rate. 

With a £100,000 lump sum a 65-year-old retiree can now buy a level single-life annuity that will provide an income of about £7.017 a year. That compares to £6,614 in February, although it is still below the £7,586 that was very briefly on offer at the post-mini-Budget peak last October. 

At the start of 2022, however, the same annuity purchaser would have got about £5,000, which means annuity incomes are 40% higher now. 

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