What’s your magic number?

The picture of retirement income in the UK is not as bleak as some would like us to think

A report has revealed those approaching retirement are expecting to receive £23,700 per year when they retire. The same survey shows that the average income in retirement today is currently just £19,000 – a shortfall of £4,700 per year, or 25%.

Old Mutual Wealth published its first ‘Retirement Income Uncovered’ study that also unearthed a new magic number for retirement income of 47% of pre-retirement income. On average, people are hoping for around half of their current salary when they retire, and those who stated they were satisfied with their income have achieved 47% of pre-retirement income.

‘Retirement Income Uncovered’ looks into the level and source of retirement income for people already retired from full-time work, plus those over 50 approaching this crucial part of their financial lives. The report provides a concise picture of current and changing sources of retirement income, changing attitudes to work in retirement and also levels of satisfaction and understanding of the different sources of retirement income.

Other key findings of the report are:

Retirement reality

We expect retirement to last for 21 years

41% of retirees receive less than £15,000 per year

There is a £7,000 gap between men and women’s average income in retirement

The changing face of retirement

Those approaching retirement are
25% less dependent on a final salary
pension compared with retired people

Those who have a retirement income goal are 63% more likely to be satisfied with their retirement income than those that do not

Planning pays

Those who had a target income in mind before they retired have an additional £157,500 income over the course of an average retirement

Retirees who used a financial adviser are more than twice as likely to have a target income in retirement – with an average income of £26,000

The emerging world of pension drawdown

Using pension drawdown can reduce the pension pot required by 25% to generate the average income of £19,000

Even as income drawdown hits the headlines, only 17% claim to have a good level of understanding of it

Making a greater contribution to those yet to retire In addition, the report examines how pensions may contribute less to retirement income in the future with other sources expected to make a greater contribution to those yet to retire – property downsizing contributes an average 2% to those currently retired, yet rises to a 15% expected contribution for those yet to retire.

The survey also shows that people approaching retirement are not the ‘rabbits in headlights’ that many describe. Far from being frozen in fear, the study uncovers a pragmatic Britain that is adjusting expectations and facing up to the challenges of a retirement that people realistically expect to last for more than 20 years.

Retirement income is changing and people are preparing to use many different sources to fund this stage of their lives. The ‘Retirement Income Uncovered’ findings show that people are adapting their behaviour accordingly, and the picture of retirement income in the UK is not as bleak as some would like us to think.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

Source data:
Old Mutual Wealth partnered with YouGov to conduct research into the attitudes and behaviours of those currently in retirement or approaching retirement. The research was carried out via an online survey amongst YouGov’s consumer panel. The sample consisted of 1,536 UK adults aged between the ages of 50 and 75. The sample was split up into five brackets (50-54, 55-59,
60-64, 65-69 and 70+) with a target quota of 300 participants in the research from each age bracket. YouGov invited a nationally representative sample to take part within each age bracket. Fieldwork was carried out between 4-10 July 2014.

Full nest households

The financial pressure on parents providing board to their adult offspring

Parents with adult children living under their roof are spending £1,200* more than their Empty Nester counterparts each year on everyday household expenditure, bringing the total annual cost of ‘Full Nest Syndrome’ in the UK to £3.2 billion[1].

Meet the Full Nesters, a new report recently published by the Scottish Widows think tank Centre for the Modern Family, delves into the financial, practical and emotional strain placed on parents who are providing room and board for their adult offspring, and it also explores the impact this is having on the modern family dynamic.

Boomerang kids
With the latest figures showing that more than a quarter of adults between 20–34 are still living at home[2], and a fifth (19%) of students are opting to stay at home while studying[3], the ‘Boomerang Kid’ phenomenon is increasingly morphing into a ‘Never Fledged Generation’ – those for whom the high cost of living and accommodation means they are unable to fly the nest, even for a short time.

To cope with the additional cost of having their adult children living at home for longer, the report finds that Full Nesters are making greater financial sacrifices than Empty Nesters across the board, with some putting their own financial future at risk.

One in three (31%) have cut spending on vital items such as groceries, compared to 21% of empty nesters, while 16% have needed to take out a loan, spent on credit cards or gone overdrawn, against 7% of empty nesters. A third (30%) of Full Nesters report they are contributing less to their savings, while more than one in four (28%) are spending their savings to meet the cost of everyday living.

Compromising future plans
In contrast to Empty Nesters, Full Nesters are prioritising their family in the here and now, often at the expense of their future plans. Almost half (44%) say their current focus is providing for their family, compared to 23% of Empty Nesters, while a third of Full Nesters (34%) are focused on paying off debt, compared to 17% of Empty Nesters. Moreover, many Full Nesters are conscious that this could be compromising plans for later life, with a quarter (24%) saying they wish they were able to focus more on preparing for the future.

On top of covering the cost of having adult children under their roof, the report finds many Full Nesters are providing additional financial support to their offspring. Two thirds (62%) of Full Nesters say they are financially supporting their children, compared to just 37% of Empty Nesters, with 32% of Full Nesters not expecting to get the money back. Despite this, the majority (63%) are happy to lend money to help their family members out.

Source:
Meet the Full Nesters, the second of three reports to be released this year by the Centre for the Modern Family looking at intergenerational finances, identifies eight generation groups* within the modern family unit, who are still feeling the impact of living costs in different ways as the UK comes out of recession.
* For the purposes of this research, the Centre for the Modern Family identified eight generation groups that exist in the modern family today:
1) Individuals living with friends in rented accommodation
2) Under-34s living at home with parents
3) Co-habiting/married couples without children
4) Parents with children under 18
5) Parents with grown-up children (over 18) who are still at home (full nesters)
6) Parents with grown-up children (over 18) who have left home (none still at home) (empty nesters)
7) Grandparents providing childcare for family members (grandchildren or otherwise) 8) Providing regular care and support for a relative
[1]ONS data shows that there are 2.7 million households in the UK with adult children living at home. Centre for the Modern Family data shows that the average monthly household spend reported by Full Nesters is £460, compared to £360 for Empty Nesters, which equates to an additional annual spend of £1,200. Multiplied by the ONS figure of 2.7 million full nests gives an overall figure of £3.3 billion
[2]ONS Young Adults Living with Parents 2013
[3]Higher Education Statistics Authority
The research was completed by YouGov and the findings are based on 2,082 online interviews with a nationally representative sample of adults aged 18 and over living in the UK. The interviews were conducted between 28 April and 1 May 2014.

Care fees burden

It’s a fact THAT more of us will require specialist care in our later years

Today, the cost of care is a major concern for many people, with the average level of pension savings unlikely to be enough to cover any long-term care requirements in addition to providing a retirement income.

Catching people off guard
So why is care fee planning catching so many people off guard? Well, besides the fact that few of us like to think of ourselves going into long-term care in our old age, there are a number of other reasons. As we can now expect to live for 20 or 30 years beyond our selected retirement age, it becomes more likely that we will need specialist care in our later years.
Moreover, research compiled by the Institute and Faculty of Actuaries shows that while life expectancy has been increasing, healthy or disability-free life expectancy for both men and women has not nearly kept pace, leaving more people needing long-term care.

The need for care fee planning
Estimates are that one in three women and one in four men aged 65 today are likely to need care.

Even more relevant for long-term care is the number of over-85s, which is expected to more than double in the next 20 years[1].

Meanwhile, incidences of dementia are rising. It is forecast that the number of people in England and Wales aged 65 and over with dementia will increase by over 80% between 2010 and 2030, to 1.96 million[2].

These individuals will all need specialist care. As it stands, the average cost of dementia care per person is more than the average UK salary. In 2008, dementia cost the UK economy £23 billion – more than the costs of cancer and heart disease combined[3].

Introducing a cap on care costs
Under the Government’s new Care Bill, a cap on care costs will be introduced to prevent people paying more than £72,000 towards their own care. But while the care cap offers a safety net that will prevent some individuals from facing significant care costs, it will not replace savings as the key means of paying for care.
The cap only applies to local authority-set care costs – it does not take account of daily living costs or top-up care costs. With or without government support, it makes sense to plan for the unforeseen cost of care, not least because there is no specific savings product for care home fees. If you are not yet retired, start by drawing up a financial plan which includes the potential cost of care.

Allowing you much greater freedom 
The good news is that this year’s Budget changes allow you much greater freedom as to how you utilise your pension savings, enabling the money to be used for other purposes. Even if you end up not needing the money, saving something extra into your pension for the possibility of long-term care will mean the added bonus of a bigger pension pot.

You could also choose to use your annual New Individual Savings Account (NISA) allowance for this purpose. You will have instant access to your savings when you need it, which you can draw tax-efficiently.
These can help ensure you have a regular income that can help with the burden of care fees while not eating into your original capital.

Source:
[1] Office for National Statistics, 2013.
[2] Lords Select Committee on Public
Service and Demographic Change, 2013.
[3] Carers UK, 2012.