Auto-enrolment  

Tisa: 8% pension contributions 'simply not enough' for a comfortable retirement 

Tisa: 8% pension contributions 'simply not enough' for a comfortable retirement 
 Credit: Anna Shvets via Pexels

A recent study by Which? surveyed more than 6,800 real retirees to establish clear minimum pension pot requirements for an essential, comfortable or luxurious standard of retirement.

This is vital research and a valuable indicator for individual contributors and households looking to secure a comfortable future. 

However, several factors have the potential to complicate this picture.

For one, according to studies conducted by Tisa, the tax free cash allowance is nearly always withdrawn and often earmarked for big ticket purchases, resulting in some households failing to save enough to reach a comfortable standard of retirement despite contributing what they believe to be sufficient funds over their working lives.

Saving enough?

Although the introduction of Auto Enrolment (AE) in 2012 has led to record numbers of employees contributing to their workplace scheme, challenges remain.

It is essential that they must now save enough, or they risk creating an inadequate retirement pot.

And for these to be sufficient, we need to understand the additional financial pressures retirees will almost certainly encounter at, during and towards the end of the course of their retirement. 

The new Which? research concludes that couples will typically need net income of £26,000 and singles £19,000 a year for a comfortable retirement.

However, when additional factors such as raising a family, caring for elderly relatives, consistent increases in life expectancy and inflation proofing are considered, annuity income can be as much as halved.

Importantly, the fund value required for a household to achieve a comfortable retirement through an annuity is £265,420. This is based on the purchase of a level annuity with 50 per cent spouses guarantee.

Upon first death, the surviving spouse would experience a significant drop in income through the household loss of basic state pension and 50 per cent of the annuity. 

Were the annuity to provide indexation and 100 spouses pension, the fund value required would need to be circa £400,000.

Tisa’s modelling for a median earning household journey based* on AE starting at 18 and contributions based on full salary indicates that a contribution level of 12 per cent would broadly achieve this.

However, life journeys can vary enormously, and it is therefore vital that retirees are equipped to understand the impact that life events might have on pension saving and, subsequently, their retirement outcomes.

Tisa's modelling is based on an optimistic baseline, as it presumes that the mid 2020 proposals have already been implemented in full, although we do not currently have a firm date in legislation.

It also assumes that no tax free cash is taken and is used for annuity purchase. As mentioned above, tax free cash is nearly always taken and if this not used for retirement purposes, contribution levels of over 12 per cent would be required. 

Future challenges

Half (50 per cent) of people who accessed their pension pots for the first time in 2019/2020 did not seek any advice or guidance.