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Employees are deluded when it comes to working out retirement income

David Woods , 09 Sep 2010

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Tomorrow's generation of 'mass affluent' retirees are set to face disappointment on a significant scale as over two thirds overestimate how much their pension fund equates to in income and as such, will fail to achieve their annual target level in retirement.

According to Sun Life Financial of Canada 62% of mass affluent and high net worth (HNW) retirees expect an annual income of £30,000 to enjoy a fulfilling retirement but  40% have less than £300,000 saved, whilst one in three (34%) have ‘only’ amassed a retirement fund of between £100-£200K. In reality, a retirement fund of £600,000 is required to support this level of annual income over a 20 year period.

Sun Life Financial of Canada’s report, which is based on extensive qualitative and quantitative research with over 1,000 consumers, who each have a minimum pension fund of £100,000, reveals how well prepared in essence this group regards itself, yet the income gap and reality check many will face as they reach retirement. It also examines five key retirement risks more relevant to this group than any, and identifies strategies to navigate these risks successfully.  

The research also shows almost half (49%) expect to generate £20,000-50,000 from their pension and other savings (though 21% expect an income of over £50,000) but in reality, nearly half (40%) of respondents have less than £300K and 1 in 3 (33%) have less than £200,000. As such, almost 70% of people in our survey will miss the lower end of the income range they expected from their pension and other savings.

The findings reveal employees aversions to risk increases as retirement draws near, but attitudes to risk are not homogenous.  Some evidence suggests those with the highest wealth are more disposed to take some financial risk.

The report also highlights retirement is a two step process; a temporary interim stage leading, at some point, to what is recognised as a traditional model of retirement  without work. Approximately 40% of people expect to continue to work after retirement. Most (64%) will continue to work part time in their current field, whilst a third plan to work in the voluntary sector

 Research shows that few people could think about their retirement spending patterns long term.  Whilst they are aware of the possibility of care being required, people are largely unable to plan for the longer term.

Commenting on the report launch, Mark Stopard, head of marketing at Sun Life Financial of Canada said:  "With the move from defined benefit to defined contribution schemes, the encouragement to save independently has been acknowledged. However, what is still clearly misunderstood is the level of income people can expect from their savings. Although a fund of £100,000 or more seems a significant sum of money, at current annuity rates, the actual income will be a huge step down for the majority of these retirees.   

"For someone with a retirement fund of £100,000 or more, taking a conventional annuity may not be the best option.  The results of the Treasury consultation which closes on 10 September may affect the requirement to annuitise, which is a significant step forward for the mass affluent market.  Long term planning, especially on deccumulation patterns, understanding how to negotiate risk avenues and seeking professional advise is a must for this group and the industry needs to provide flexible product solutions that are capable of responding to the changing face of retirement.

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