Research has recently been published looking at people's attitude to pensions and savings. It was found that many people had unrealistic expectations about their retirement, regardless of age. For example, the majority of those under the age of 35 questioned believe they will retire before the age of 64, despite the fact that they will face a state retirement age of between 66 and 68 depending upon the exact month and year they were born. These unrealistic expectations were not just in the under 35s. Those aged 35 - 54 will face a state retirement age of between 66 and 68, but the vast majority believe they will be able to retire by the age of 63, and those over the age of 55 who face a state pension age of 66 believe they will have retired by the age of 62.
But what are the reasons why people have such unrealistic retirement expectations?
- I have a workplace pension
Too many people simply believe that having a pension means they will enjoy a comfortable retirement. However, this is not the case. People need to engage more with their pensions and take the time to look at them and get forecasts of what they could be expecting when they retire. Doing this should flag the fact up for most people that they are simply not saving enough to fund their expected retirement and hopefully provoke them into taking action and saving more. As an example, someone in a final salary public sector scheme that is also contributed to by their employer (often regarded as the gold standard of pensions) could only expect to retire on half of their final salary after 40 years of paying in. That's a big drop in income and for those in less generous pension schemes, the drop will almost certainly be more.
- The State Pension and other DWP benefits will take care of us
This is simply wishful thinking. In its present state, the UK government has stated that the benefits system is underfunded, and that although the present generation of pensioners will receive benefits, the next generation will be encouraged to save more to encourage no reliance on the state. It is also expected that people will be expected to work till they are 70:
"We will put in place a new mechanism to ensure that the state pension age reflects future changes in life expectancy so that the state pension system continues to be sustainable and affordable" a government source said.
That means people may still get a state benefit in the future, but they'll have to wait till the age of 70 to receive it, which is not in keeping with the vast majority of people's retirement expectations.
With the retirement age expected to eventually rise to 70, if when it kicks in at that age, will most people still be fit to work? Office workers and those in more sedentary jobs may be ok for a few more years, but what about those in physical jobs? What about builders, scaffolders, postal workers, police officers, fire fighters and warehouse staff? Will they still be able to effectively do their jobs after the age of 70 to supplement their state pension?
- We're expecting an inheritance
Some people may be lucky enough to be expecting a nice little nest egg at some point in the future which may lead them to feel that saving more for retirement is unnecessary. That may be so, but there are two factors to consider:
Is the inheritance enough to cope with the fact people are living longer? You could live 30 years from retirement, can that inheritance provide you with a comfortable amount to live on every year for 30 years?
What if the inheritance is mistimed? What we mean here is that if it's an investment in shares for example, what happens if there has been a major drop in share prices? Will this reduced inheritance be enough? The same goes with property, which sees prices rise and fall over time.
The UK government has been proactive in attempting to get people to save more for retirement with the introduction of auto enrolment. It's been a huge success so far, just 10% of those eligible have opted out. However, even with the introduction of auto enrolment vastly improving the situation, more still needs to be done to get more people to save for retirement, so that they can fulfil their retirement expectations.