Massive pensions shortfall looming for unaware over-50s

Old couple30 November 2012

People over the age of 50 are 'sleepwalking' into a pension crisis, overestimating how well-off they will be in retirement, research has found.

A report launched today by the Institute for Fiscal Studies (IFS) and co-funded by the ESRC reveals that a third of those approaching retirement report that they find it impossible even to guess how much income they will receive from their private pensions.

The report also found that six in ten people over the age of 50 who are still in work have not yet thought about how many years of retirement they might need to finance - meaning that millions of workers will be poorer than they expect when they retire.

People were underestimating their own life expectancy, with women in their 50s believing that they will live until they are 84 when their actual life expectancy is 88, and men predicting that they will live until 83 when their life expectancy is 85.

On top of this, people are still not saving enough. While the average UK pension fund makes annual investment returns of just 4.3 per cent, the returns would need to be up around 77 per cent to meet the expectations of many 50-64 year olds in defined contribution workplace pension schemes.

"These new findings show that those approaching retirement are at real risk of disappointment, if they are unrealistic about how long they are going to live and how much their pension pot will pay out when they come to convert it into an annuity," says Mel Duffield, Head of Research and Strategic Policy at the National Association of Pension Funds.

The complexities of private pensions may well be to blame. A defined contribution pension makes no guarantees about how much money it will be worth - unlike a final salary scheme, which pays a percentage of your earnings. The report found that defined contribution pension holders were more likely to be uncertain about how much pension income they will receive.

"Defined contribution pensions require people to make complex decisions both while they are accumulating their pension savings, and when they want to start drawing an income," says Gemma Tetlow, Programme Director at the Institute for Fiscal Studies and one of the authors of the report.

"Shopping around for the best available annuity rate on retirement can significantly increase the income received from a given pension fund, yet the vast majority of annuitants still buy from their original pension provider."

The researchers conclude that given the complexities around pensions, policymakers and industry need to consider how they can make it clearer for people how much they will need to save to meet retirement expectations. This is particularly important with the introduction of automatic enrolment, which will bring millions of people into defined contribution pensions.