People overestimate retirement income by 30%

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People overestimate retirement income by 30%
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A large number of individuals have little idea about what they need to save or how much income they can expect from their pension savings, a survey has found.

According to Interactive Investor’s annual retirement survey, published today (October 12), people tend to be over optimistic when estimating their likely personal retirement income.

The research found that the average income of over-65s is £16,540 and £38,213 for the II community. 

However, individuals expect that they will have an income of £21,730  come retirement, which is 30 per cent more than reality.

Younger savers hope to receive around £25,000 income, 50 per cent more than reality. 

The survey revealed that six out of 10 (61 per cent) had no idea what their income will be in retirement and only one in 10 (11 per cent) know what money they will have coming in. 

It noted that individuals became more realistic about incomes as they near retirement.

Interactive Investor chief executive Richard Wilson said: “We also see retirement outcomes being routinely compromised by just ‘not knowing’. 

“Nearly one in four (24 per cent) of the general population say they know nothing about pensions. In a world of pension freedoms, and after ten years of auto-enrolment, this feels like policy failure.”

Source: The Great British Retirement Survey 2022, Interactive Investor

Meanwhile, the report revealed that around half of women (48 per cent) aged over 65 are dependent on the state as their only source of income, compared with 29 per cent of men. 

Interactive Investor head of pensions and savings Becky O’Connor, said: “One worrying constant is that while savings are being cut back, often because there is no other option, people continue to overestimate their retirement income by an average of around 30 per cent. 

“The danger is that the cost-of-living crisis leads us head on into a full-blown retirement crisis. 

“With savings increasingly being cut to the bone, it’s crucial that where possible, people think carefully about how they balance medium and longer-term savings goals.”

Elsewhere, although income predictions varied, the research found that the average age people would like to retire is similar to the average age the current generation of pensioners retired – around 62. 

People under 40 said they would like to retire at 59, but only 28 per cent of current 59/60-year-olds are already retired.

It found that most people have no target for retirement saving and nor did the current pensioners when they were younger as most (80 per cent) said they simply tried to save as much as possible. 

Cost of living pain

The Interactive Investor survey found that the rising cost of living is now the UK’s top financial concern and a big worry for three in five (59 per cent) people. 

Of those most concerned about the rising cost of living, 73 per cent said their financial situation impacts their mental health.

Overall, two in three people (65 per cent) feel that their financial situation impacts their mental health – rising to three in four (76 per cent) people in their 20s and 30s. 

Source: The Great British Retirement Survey 2022, Interactive Investor

Wilson said: “We are privileged to publish this detailed examination of the state of the nation’s retirement finances and savings. In many parts it makes a difficult reading.

“Many people are struggling. There is a close link between wealth and health. What also emerges is the crucial role a strong healthcare system plays in enabling people to save, work later in life, and live a full retirement.”

Elsewhere, another drain is older workers cutting their hours or retiring early. 

Around 21 per cent of those surveyed have cut their hours because of ill health and 13 per cent because of caring responsibilities. 

Source: The Great British Retirement Survey 2022, Interactive Investor

This comes at a time when the government is reviewing bringing the state pension entitlement age increase to 68 forward.

The survey also found that more than half (56 per cent) of the population aged under 66 have had to curtail their savings, with one in three (36 per cent) cutting back, and one in five (20 per cent) stopping altogether. 

Young people’s savings have been hit particularly hard, with two in three (64 per cent) of 22-34 year olds having stopped, or cut back, their saving.

The crisis has also affected higher earners on £60,000 or more, with almost as many of them cutting back on their savings as those earning less than £30,000 (54 per cent versus 58 percent).

Myron Jobson, senior personal finance analyst at Interactive Investor, said: “One of the problems driving inflation is the shortage of workers in Britain. We cannot afford to have so many people forced to stop work because they or a loved one is ill. And the financial impact on these households can be horrendous and lasting. 

"This is a time of life when many people have paid off the mortgage and start saving like mad to build their retirement pot. Instead, lots are forced to begin drawing from their savings early, making a huge difference to their retirement outcomes.”

The bank of mum and dad

Over the past few months, we have seen a flurry of activity in the broker and mortgage market.

The demands of the property market continued to place additional demands on retirement funds as many retirees are grappling with supporting their children. 

One in five (21 per cent) have helped their adult children buy property by giving them money for a deposit as a gift; 6 per cent have given them a loan, and a further 2 per cent have acted as guarantors.

The gifts are generous with nearly one in five (17 per cent) parents with a household income of less than £30,000 having given a gift, and the average amount given £15,500. 

In other words, they have given half a year’s income to help loved ones.

sonia.rach@ft.com

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