A crisis of confidence? Only half of Brits expect to have a comfortable retirement

• 52% of people with a defined contribution (DC) pension are confident they will have a comfortable retirement, 48% aren’t
• Those closer to retirement are more confident – but a third of people set to retire within two years (32%) are not confident it will be a comfortable one.
• Almost half of 25-30 year olds (47%) don’t think a comfortable retirement will be possible when they’re older, due to climate change/ societal change

 
The UK is divided when it comes to confidence in a comfortable retirement; 52% of people with a defined contribution (DC) pension are confident they will have a comfortable retirement, 48% aren’t. Behind this headline split lies a more complex story – the young tend to be more confident than the old, but confidence across age groups increases for those closer to retirement. Despite that, a third of people set to retire within two years (32%) are not confident it will be a comfortable one.

The research, conducted by leading independent consultancy Barnett Waddingham, surveyed more than 2,000 UK workers paying into a workplace DC pension. Currently, just over a third of Brits have a DC pension, compared to about a quarter with a defined benefit (DB) – or ‘final salary’ – pension. However, with only 4% of DB pension schemes open to new members, the direction of travel is clear – within a decade, most workers will be in a DC scheme.

Consequently, it is a real cause for concern that almost half of workers with a DC pot aren’t confident they’ll have a comfortable retirement. The story gets more interesting when accounting for age. Young savers are most confident, at 71% of 18-24 year olds and 61% of 25-30s . Confidence then steadily declines, down to the least confident age group – 51-55, the cohort approaching pension freedoms age. A mere 42% of this cohort are confident. After 55, confidence jumps back up to 50% or higher.

But age is not the most important factor when it comes to retirement planning. More critical is the number of years people expect to work until they can retire. Unsurprisingly, older workers tend to expect to continue working for fewer years until retirement than their younger counterparts – but 25% of 18-24s still expect to retire within 15 years, an optimistic community perhaps driven by FIRE aspirations. Only 16% of 25-30 year olds, 14% of 31-35s, and 8% of 35-40s can say the same.

Barnett Waddingham’s research reveals that confidence is relatively static for people with more than 25 years of work ahead of them pre-retirement, at which point confidence starts to rise in older age groups. By the point of 5-10 years of work left, 58% of people are confident, rising to 71% of those with 3-4 years of work ahead. This dips to 65% of 1-2 year planners, and rises again to 73% of people retiring within the year.

This is undeniably good news for British workers. However, it must not go ignored that 32% of people expecting to retire within the next two years are still not confident that they’ll have a comfortable retirement.

What’s more, 4% of people with a DC pension never expect to retire at all. This is relatively consistent across age groups, except for those age 61-65 where it jumps to 8% – one in twelve. The most striking factor here is homeownership status. 2% of workers who own their home outright never expect to retire, as do 3% of people with a mortgage. But this rises to 5% of people in private rental accommodation, and 7% in social housing/ council housing.

Drivers of confidence

Barnett Waddingham’s research also looks to understand the driving force behind retirement confidence. Of the 52% of retirement-confident workers, most confidence is driven by having other investments, beyond their DC pot. 29% have other investments and 28% own a property outright. Men are more likely to have other investments than women (33% vs 25%), and to own their property outright so are able to keep retirement costs low (32% vs 25%). Investment driving confidence is relatively consistent across age groups, but owning a property jumps significantly for the 50+ cohort (Under 20% of 18-40s, under 30% for those in their 40s, over 50% for those above 50).

8% of employees are confident about retirement because they have a DB pension which will cover the bulk of their needs – this rises to almost one in five 51-55s (18%) and 61-65s (19%).

Concerningly, one in five savers (20%) are confident that because they’ve auto-enrolled that will be enough. However, with the bulk of savers only putting away the default 5% amount, most people relying on a DC scheme alone will find themselves with a shortfall at retirement.

For the unconfident, most believe they simply don’t have enough saved into their pension pots for their age (35% of retirement-unconfident workers). This rises to 45% of 51-55s, and 47% of 61-65s. 19% haven’t saved enough to cover both them and their spouse, while a third (32%) don’t believe they earn enough to save for a comfortable retirement. 29% don’t have any other savings or investments beyond their DC pot.

Further to saving, people are worried about costs – especially housing. 12% of people aren’t confident about retirement because they think they’ll still be renting as a pensioner – rising to 32% of people currently renting, and 25% of people in social housing. 8% of people expect their retirement pot to go towards care costs.

A lack of visibility around retirement also plays a part. 26% of people who aren’t confident about retirement simply don’t know what a comfortable retirement would look like or how to get there, and 8% haven’t thought about retirement at all.

And it’s not all about personal finances. 29% of people don’t think a comfortable retirement will be possible when they’re older, due to climate change/ societal change – this rises to 47% of 25-30 year olds, and 41% of 31-35s.

Mark Futcher, Partner and Head of DC Pensions at Barnett Waddingham, said: “In a rare glimmer of good news, people are currently more confident about retirement the closer they are to it, meaning something is going right. But there are two key areas for concern. Firstly, a third of people planning to retire in a couple of years are going into that period of their life without confidence that they’ll be able to live comfortably. And most people who are confident are such because of other wealth, property, or private and DB pensions. This is not much use to most young workers, who tend to have low savings, lower prospects of buying a house, and solely DC workplace schemes.

“There’s two major solutions that policy-makers must pursue. The first is to improve the auto-enrolment system, by widening who it includes and increasing minimum contributions – including auto-escalation of contributions with pay rises and after career breaks. The aspiration should be to build a DC system that generates employees a comfortable retirement, without needing further wealth to survive.

“The second is to hone in on the cohort approaching retirement, and work to ensure that people are able to confidently visualise their income and lifestyle after employment, This is going to require significant innovation and a much more robust at-retirement framework, specifically working to increase confidence in older workers that a comfortable retirement is possible for them. With political upheaval likely in the months ahead, it’s critical that the industry pushes for consistency of focus – long-term pensions cannot be a short-term political football”

Mark shares three things to consider to improve pension confidence:

 
While the burden should not and cannot fall exclusively to individuals, there are some things everyone can do to help improve pension confidence:

1. Do something: Pay in more – especially after career breaks

 
Increasing auto-enrolment contributions is one of the most effective ways to boost your confidence about your pension – and the sooner you do it, the easier it is to build a substantial retirement fund. Check that you receive the maximum contribution from your employer, particularly if they use a tiered contribution structure. Additionally, using pay rises as a prompt to increase contributions can enhance your confidence in securing a comfortable retirement. If you increase your contribution at every pay rise, you won’t notice the impact on the amount you take home each month – after all, you can’t miss what you never had!

2. Learn something: Empower pension knowledge through education

 
Knowledge is power. Only when you know how much is in your pension, how much should be there, and what your financial prospects look like can you have true confidence. Not everyone understands the benefits of tax-efficient saving vehicles and allowances – in fact,28% of defined contribution (DC) savers have never logged in to check their pension online. If you’re struggling to understand anything or track down your pension, access the Government’s Money Helper or speak to an adviser.

3. Fight for something: policy adjustments to empower confidence at retirement

 
As we approach a general election, it’s time for a shake-up to the pensions system. Policy makers can help encourage confidence by introducing higher default contribution levels for when employees join the pension scheme, ensuring they automatically save a substantial amount and only need to opt-out actively rather than having to proactively increase contributions themselves. Additionally, it could entail implementing auto-escalation for employees to gradually increase contributions regularly. Even a small annual increase in contributions, such as just 1% of pay, can make a significant difference in boosting retirement outcomes and encourage people to feel more confident about their future as a result. Writing to your MP and calling for change can impact not just your own pension, but that of many generations to come.