The statutory requirements for member pensions illustrations changed on October 1st 2023. While they outline some prudent assumptions, mallowstreet research worryingly shows that just 21% of DC schemes factor in member financial needs in retirement when gauging value for money and the adequacy of member outcomes. Given these developments, mallowstreet Insights has reviewed retirement pot size estimates and how adequate they are according to the PLSA retirement living standards. Here is what we found out – and what you should consider. 

 

 

The PLSA has quantified the annual income required to meet three different standards of living in retirement. To achieve them, retirees might need the following annual income: 

Many pension income simulations assume that retirees will receive the full state pension. Factoring it in can be helpful in determining the adequacy of the estimated annual income in retirement. 

 

The state pension currently amounts to £10,600 per year. Subtracting this sum from the amounts above (once from the sums for a single retiree and twice for a couple), here are the supplementary annual income streams that DC pots might need to generate for singles and couples with a state pension (assuming they do not have a DB pension): 

 

 

Most estimates of target pension pot sizes assume that retirees will receive the full state pension. In this context, the DC pot will be used to generate a supplementary annual income. Adding the two together can help members understand what level of income they may receive in retirement, and what standard of living it will afford them.  

 

As part of gauging the likelihood of members achieving their desired standard of living, it helps to estimate the pension pot that may be needed. While it can be discouraging to communicate this number directly to the member, factoring in the adequacy of member outcomes in pension calculators is key. 

 

 

For example, Standard Life estimates that a single person would require £315,000 to achieve a moderate standard of living in retirement, taking into account the state pension and an income purchased via an annuity of £14,900 a year. A couple, able to pool resources, would need £155,000 per person. To achieve the comfortable lifestyle, Standard Life believes a single person would need £675,000, while couples would require £418,000 each.  

 

Fidelity, in turn, estimates that if a couple receives two state pensions, then a pension pot of £180,000 can produce an income stream for 25 years, starting from £7,400 in the first year and then adjusted for 2% inflation annually for the remainder of time. Adding back the two state pensions yields an annual income of £28,600 for a couple, which tracks towards a minimum to moderate standard of living in retirement.  

 

According to Evelyn Partners, a 65-year-old retiree with a £100,000 lump sum can buy a single-life annuity providing around £7,017 a year. Adding the state pension of £10,600, this gives a total retirement income of £17,600 per year, which points towards a minimum to moderate standard of living. 

 

 

For example, Ruffer estimates assume a hypothetical pot of £500,000 and an income requirement of 8%. This is based on the average rate of annual withdrawals as reported by Financial Conduct Authority retirement income market data but is higher than the ‘rule of thumb’ figures of 3-4%. With an average annual investment return of 5%, this pot will deliver an income of £40,000 per year for 20 years. This would provide a comfortable standard of living to a single retiree. 

 

Finally, LCP estimates that you need a £100,000 pension pot to afford a £11,130 annual single-life annuity from age 80 onwards – which implies members will need a significantly bigger pension pot for an annuity starting from an earlier age. 

 

 

The PPI DC Future Book 2023 reports average DC pot size of £12,300 as of 2022. For people aged 35-44 in 2023, they estimate that by 2043, pot sizes can grow to anywhere between £25,000 and £334,000 (based on 10th and 90th percentiles respectively), with the average pot in 2043 expected to be only £67,000. These pot sizes are largely inadequate to achieve financial security in retirement. 

 

Similarly, Aviva’s recent report ‘Planning for Retirement in the 2050s’ points out that middle income workers aged between 32 and 40 years old and earning a salary between £25,000 and £44,999 per year could build up over £250,000 by the time they reach retirement. However, this would be unlikely to provide them with a moderate income in retirement according to the PLSA living standards. 

 

Finally, Broadstone estimate pension pot sizes based on a hypothetical worker starting employment now on a salary of £25,000 and contributing a total of 8% over a full career of 40 years, with conservative investment returns of 2% per year. This worker would amass a pension pot of around £190,000, which will likely fail to meet a moderate retirement living standard in retirement.