Hurdles faced by later-life savers

And the challenges are significant.

In a nutshell, someone who is 45 will need to save a lot more each month into a pension just to catch up with the sort of levels of pension saving a 25-year-old will have achieved through years of accumulated pension saving. 

A spokesman for Royal London puts it like this: "A rough rule of thumb is that people should save half their age as a percentage of earnings.

"For example, a 50-year-old should be saving 25 per cent of their earnings."

For some people, particularly those on lower salaries, or who may be trying to recover financially after divorce or bereavement, this might seem daunting. 

The financial situation for a large number of over-50s is far more precarious than was previously recognised. Justin Urquhart Stewart

However, the spokesman added: "Even saving a little, often, and increasing it when finances permit - for example, when given a pay rise - will help to provide a tax-efficient nest egg for the future."

There is also the prospect that those who start saving later on in life will not be able to retire as early as they may have hoped, unless they are prepared to cope with a meagre existence before the state pension kicks in. This, too, presents a challenge to people starting out later in life.

How widespread is this problem?

The London Institute of Banking and Finance (LIBF) carried out research among 2,000 people aged 50 and above, who had at least £50,000 in assets - including their home and pension savings. 

Despite having some level of current financial security, the research soon discovered that many of these people are "underprepared for the financial challenges they may face in later life". 

In fact, for the majority of people, even those who did have some form of pension saving, their main residence was the asset on which they were relying to help them financially in later life.

Some of the findings from the survey included: 

• 50 per cent of those not yet retired feel well prepared for the day they stop work.
• 35 per cent worry about how they will manage financially in retirement.
• Almost two in five admit they are going to have to work longer than they had planned.
• 47 per cent say they know they need to save more for retirement.
• Despite property values accounting for more than half of total assets in this group, less than one in 10 planning for later life are currently considering either downsizing (5 per cent) or releasing equity (8 per cent).
• Only 20 per cent of those approaching retirement age (50-59) have taken financial advice.

Alex Fraser, chief executive of LIBF, comments: "What comes through loudly and clearly from these initial findings is that this is a prudent, waste-not-want-not generation but too many are unprepared for the reality of a retirement that can now stretch out for decades.

"They dream of a long, happy retirement that ends with them passing on a nice inheritance to their children, but the reality for many could be painfully different."

The challenge of being too cautious

The same survey carried out by LIBF, in association with wealth manager Seven Investment Management, also found that older people who knew they had to save more were prepared to do so - but they were less likely to take investment risk.

The study found those aged 50 and above were:

• Comfortable investing in cash Isas (83 per cent) and National Savings & Investments savings accounts (74 per cent).
• They were less comfortable in putting their money into investment trusts or funds (39 per cent) or stocks and shares (40 per cent).
• 77 per cent are not currently taking financial advice.
• 44 per cent said they didn't have enough knowledge to make the best financial decisions.

Again, this poses a challenge to people who know they ought to be saving more to help themselves in retirement, but do not want to take any investment risk.

With the Bank of England base rate still at 0.5 per cent for the ninth year running, and inflation of 2.3 to 2.4 per cent far outstripping returns on cash accounts and many high street cash Isas, those being too cautious with their savings will end up seeing the spending power of what they have put away eroded by inflation. 

If they were to put this into a pension scheme - whether into a workplace scheme or not - and invest in a diversified portfolio that included some investment risk, they would benefit from some measure of compound returns over a period of 10 to 15 years.

This would produce a far better pension pot than squirreling money into a high street cash Isa. 

Vince Smith-Hughes, retirement expert for Prudential, says although there is the potential for market risk and sequencing risk, people should be looking at a diversified portfolio.

He explains: "A diversified fund that invests in equities both in the UK and overseas, property, fixed interest and other asset classes, effectively does the job for investors."

Justin Urquhart Stewart, co-founder of Seven Investment Management, states: "While investment risk might not be for everyone, and we all know that stellar stock markets gains can easily be reversed, too much caution can actually cost as inflation has outstripped cash returns – something many people are worrying about themselves.

Working longer is one of the most powerful ways of paying for our actual 'later life', when it comes Alistair McQueen

"Longevity means they need their retirement savings to stretch further than any generation before them – over 20 years for today’s 65-year-olds, on average. The findings show that the financial situation for a large number of over-50s is far more precarious than was previously recognised.”

His point is that even if one does intend to retire at 65, this does not mean the pot needs to be automatically converted into cash or cash-like securities at the point of retirement.

The need to save for longer

The logic of longevity dictates that a pension pot - or at least a portion of it - may have to remain invested for longer.

Referring to research carried out by Seven Investment Management in 2017, his colleague Matthew Yeates, investment manager, explains: "An investor’s time horizon is often used to temper their investment risk.

"With life expectancy on the up, many of them will be invested for much longer then they may have planned and so the point of retirement is not the point to stop investing for growth."

This is a point reiterated by Andrew Pennie, head of pathways for Intelligent Pensions, who says the only real restriction for an older person making a late start in pension saving is the fact pensions can be accessed from age 55.

In his opinion, individuals should be thinking much longer-term. He comments: "A late starter should probably be looking for their pension savings to be invested way beyond age 55 to build adequate retirement resources."

This may also coincide with people's plans to work past their expected retirement age. As Alistair McQueen, head of savings and retirement at Aviva notes, it is illegal to make someone retire just because they have reached a certain age.

While people are still earning, their pension pots are still growing. He points out there are nearly 10m people aged 50 and above in work, and this trend is only likely to continue as people meet the challenge of securing a comfortable retirement through maximising their earnings as long as possible.

"Working longer is one of the most powerful ways of paying for our actual 'later life', when it comes," Mr McQueen adds.

simoney.kyriakou@ft.com