Expected retirement living standards for DC pension holders improve

The expected living standards provided by defined contribution (DC) savings in retirement improved in Q4 2021 and are broadly in line with expectations seen at the start of the year, according to Aon’s UK DC Pension Tracker.

The tracker, which measures the expected retirement outcomes of four sample DC pension savers against the Pension and Lifetime Savings Association (PLSA)/Loughborough University Retirement Living Standards, increased from 58.4 to 59.7 over Q4.

However, Aon warned that this masks a more complex picture for different age categories, noting that strong investment returns had a much more pronounced impact for savers with larger DC pots already built up, with 40- and 50-year-old members' savings increasing by around £400 per annum (pa) and £500 pa respectively in Q4.

Whilst younger savers also benefited from this, Aon explained that their existing fund value was relatively small and the majority of their benefits will be built up in the future so the returns had less of an impact, recording the smallest increase in expected income of around £125 pa.

Furthermore, whilst the expected income for the oldest savers increased by around £150 pa over the period, it remained the lowest income overall.

Indeed, Aon suggested that oldest savers are expected to be the worst off in retirement, with a retirement income between the minimum and moderate standards of living, although this is excluding DB benefits, whilst the younger three savers are all currently expected to achieve between moderate and comfortable standard of living in retirement.

Age discrepancies were also seen over the past year more broadly, as Aon clarified that whilst high investment returns on growth assets led to increases in fund values almost universally, lower expectations of future returns reduced the expected outcomes for savers, particularly younger savers.

The update revealed that a younger saver of around 30-years old would have seen a reduction in their expected income across the year of around £450 pa, whilst in contrast, a 50-year-old saver could expect to be almost £2,000 pa better off in retirement.

A 60-year-old saver’s income is also expected to have increased by around £700 pa in 2021, although Aon again clarified that this increase would still not move the saver into the PLSA’s “moderate” living standards.

Further concerns may also lie ahead, as Aon noted that, generally, growth assets fell in the first quarter of 2022, warning that the markets look set for a period of high volatility due to ongoing geopolitical tensions and their knock-on effects on the economy.

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