The UK is expecting tough times in retirement, especially females

A new report on Retirement Readiness shows the UK lagging behind Australia and America in its level of preparedness for retirement. The UK is the least well-informed, least likely to be saving sufficiently and least likely to have contingency plans in place to protect them should their circumstances change, says Rebecca Deegan, IFoA Policy Manager.

In all three countries, workplace pensions are transitioning from defined benefit to defined contribution (DC) pensions frameworks. In addition, as of April 2015, none of the three countries has a requirement for individuals to turn their DC pension into a guaranteed income. This means individuals face the challenging task of making sure their pension does not run out, despite not knowing how long it will need to last (i.e. when they will die).

In light of this the IFoA joined forces with the American Academy of Actuaries and the Actuaries Institute of Australia to survey 2953 men and women of working age assess how well-prepared they were to manage their income in retirement. We found respondents to be under-prepared in all three countries, but nowhere more so than in the UK.

UK respondents were less likely than those in Australia or America were to have any personal savings set aside for retirement, have sought out any information in preparation for retiring or have an idea of how they are going to budget any savings or pension they do have. Therefore, whilst it is concerning, it is not surprising that over half of UK respondents are anticipating a poor or modest lifestyle in retirement and four out of five respondents said that they would not have enough money in retirement if they had to stop working prematurely.

Our results suggest that workplace pensions could play a pivotal role in turning this around. We have the highest rate of assumed dependency on the State Pension and the lowest level of personal savings, but a similar level of saving into an occupational pension as Australia and the US. We are already seeing the positive effects with more people saving as a result of automatic enrolment. The next challenge will be to see if we can get people saving enough.

The survey also found that retirement readiness is highly gender biased, with females expecting poorer outcomes and being less prepared than males. With 47% of men preparing compared to 34% of women. Interestingly we found this pattern to prevail across all age groups. The comparison was particularly stark when we asked respondents whether they knew how long their money would last in retirement.

Females in the UK were least likely to know how long their retirement savings would last – just 15%, compared to 38% of males. Whereas approximately a quarter of females and half of males in Australia and America did not know how long their savings would last.

Worryingly, when we asked respondents what they would do if they ran out of money a fifth said they did not know, whilst a third said they would go back to work and just under half said they would reduce their spending. Returning to work may or may not be a realistic option depending on age and health at the time of the drop in value. Additionally a reduction in spending could have a negative impact on their quality of life.

We are therefore calling for governments, regulators, employers and the pensions industry in all three countries to take action to help people avoid running out of money before they die. To achieve this we have suggested a three-pronged approach:

1. A greater focus on improving financial capability by segmenting the population to ensure those who are in most need (i.e. females) receive adequate focus; and by targeting the information, to ensure it is relevant.
2. There will remain a large proportion of the population unwilling or unable to engage. Therefore, the role of appropriate defaults is vital within a good pensions framework. These should focus on helping people to save enough before they retire, and then post-retirement to turn those savings into an adequate income for the duration of their lifetime.
3. Based on expectations and lack of personal savings, our survey suggests that the State Pension will remain an important part of retirement income for many people. Therefore it is important that this continues to keep pensioners out of poverty and that it is sustainable.