'Mixed position' for savers despite DC retirement expectation improvements

The expected future living standard in retirement provided by defined contribution (DC) savings has “somewhat surprisingly” improved over Q2 2022, although savers will face mixed positions, according to Aon’s UK DC Pension Tracker.

Aon explained that the tracker “masks a more complex picture” driven by expected returns rather than the reality of current markets, pointing out that the DC tracker fell from 61.3 to 58.1 when looking only at the actual returns over the period.

Indeed, Aon noted that high volatility due to ongoing geopolitical tensions saw weak investment returns on the majority of asset classes were weak over the quarter, particularly for more ‘defensive’ bond assets.

However, as with the previous quarter, this fall was more than offset by an increase in the future expected returns on savings, with these "higher but uncertain" future returns pushing the tracker up from 58.1 to 72.7 in Q2.

Savers may face mixed positions though, as the analysis found that the weak investment performance in isolation over Q2 would be more pronounced for those savers with larger DC pots.

A 30-year-old saver, for instance, would be expected to be around £450 per annum worse off in retirement, compared to £1,100 for the 50-year-old.

Furthermore, while the younger three savers in the analysis are all currently expected to achieve between moderate and comfortable standard of living in retirement, the oldest saver is expected to be the worst off, with a retirement income slightly below the moderate standard of living, excluding any defined benefit (DB) pension.

In light of the findings, Aon said that pensions can be complex and throw up “surprising results”, warning that this may feel overwhelming for some savers amid the current economic volatility.

However, Aon partner and head of UK retirement policy, Matthew Arends, suggested that there are ways for members to mitigate against negative shocks close to retirement.

“If we take the example of an individual looking to buy an annuity at retirement now, their DC account will have fallen over the first half of 2022. However, the cost of buying an annuity has also fallen by around 25 per cent," he explained.

"Matching investments to how you expect to take your income in the run up to retirement can help minimise any shocks close to retirement.”

Arends also emphasised that pension saving can be "one of the most efficient ways to save for your future", stressing that while it may be tempting to cut back on pension contributions amid high inflation, savers should be wary of the long-term impact of this.

"While this may help with short-term living costs, ultimately the more individuals can save into a pension, and the earlier in their career they can make savings, the higher their retirement income will be," he said. "So try to keep on contributing if you can.”

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