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What is an adequate retirement income?
The Pensions Policy Institute (PPI) has published a report, sponsored by The Centre for Ageing Better, entitled: “What is an adequate retirement income?”. The report looks at debates around adequacy and the questions of what adequacy is, how it should be defined and who is responsible for providing it.
Head of Policy Research at the PPI Daniela Silcock commented:
“Changes in the way people work, save and retire mean that traditional measures of adequacy are not as relevant as they used to be. A new consensus is required to generate retirement income adequacy targets which people can use, and which allow for both income and liquid capital in retirement...
Under current adequacy measures, a quarter of people approaching retirement are unlikely to achieve a minimum acceptable standard of living in retirement and fewer than one in 10 can expect to achieve a comfortable standard of living. These stark figures underscore the urgency to develop relevant, accessible and achievable adequacy targets for those saving today, and for future generations.”
Some of the findings include:
- People are experiencing increasing additional demands on retirement income.
A number of social and policy changes are increasing the demands made on assets originally saved to provide a retirement income.
These include:- A widening gap for some between leaving work and receiving the State Pension,
- Paying for rent in retirement as fewer expect to retire as owner-occupiers,
- Paying off debts carried into retirement, and
- Supporting other family members with regular financial payments, housing deposits and loans.
- Older people who lose their jobs as a result of COVID-19 may struggle to return to the labour market.
The age group with the highest redundancy rate as a result of COVID-19 is those aged 50 years and over, with 12.8 thousand people being made redundant, up from 4.4 thousand at the same time in the previous year (November 2020 to January 2021). - Assessing Adequacy
There are two traditional approaches to assessing adequacy which stem from very different perspectives:- The fixed income target, which has its origins in the state underpin and avoidance of deprivation, but has developed into objective ‘basket of goods’ approaches, which price a basket of goods and services required for a particular living standard and translate these into an annual required income.
- The proportional income target; which focusses on assessing subjective individual comfort and has its origins in the view of the engaged employer. Replacement rates, the ratio of incomes after and before retirement, are a widely used method. These focus on the proportion of working-life income required to replicate working-life income in retirement.
Daniela Silcock, Head of Policy Research at the PPI said
“Changes in the way people work, save and retire mean that traditional measures of adequacy are not as relevant as they used to be. A new consensus is required to generate retirement income adequacy targets which people can use, and which allow for both income and liquid capital in retirement. Achieving a consensus will not be straightforward as it requires agreement from industry, employers and unions and the overall support of Government in order to ensure all key stakeholders play their parts. Therefore, action from the Government to pursue this agenda will be necessary soon, to help prevent future generations of older people experiencing poor retirement living standards.
Under current adequacy measures, a quarter of people approaching retirement are unlikely to achieve a minimum acceptable standard of living in retirement and fewer than one in 10 can expect to achieve a comfortable standard of living. These stark figures underscore the urgency to develop relevant, accessible and achievable adequacy targets for those saving today, and for future generations.”
Please note: The value of your investments can fall as well as rise and is not guaranteed.
The information in this article is correct as of 21/07/2021.